Multicurrency Commentary 4th Quarter 2011

The safe haven dollar rally that dominated much of 2011 faded as the world embraced the “risk on” trade with renewed vigor. During the 4th quarter oil surged, equity markets rallied, and the US dollar began to lose value.  Though the Federal Reserve Majors Index fell in value for the period, performance varied greatly across the major currencies and reflected the shift in market sentiment towards recovery and growth, and away from decline and global recession.

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3rd Quarter 2011

During the 3rd quarter the dollar staged a powerful safe haven rally. Though our strategy emphasized currencies associated with more hawkish central banks, and stronger balance sheet nations (like Norway and Sweden), the broader market thought otherwise and allocated funds to the Japanese yen. We believe countries that are good stewards of their economic resources will have stronger currencies over the long term.  In addition to this preference, our investment process leads us to underweight currencies associated with weaker economies and central banks with accommodative monetary policies. As a result, we have had a disposition to be perennially underweight the yen.

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2nd Quarter 2011

We noted in our last commentary that the role of the Japanese Yen as a safe haven currency had largely been eclipsed by the Swiss franc.  In fact, in our March commentary, the "Changing World of Fixed Income and Currency Safe Havens", we wrote that the G-7 currency intervention had likely set the high water market for the Yen against the dollar.  It appears that it has.

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1st Quarter 2011

Our strategy was positioned at the start of the year for a continued recovery in the euro and underperformance by the Japanese yen. Indeed, the euro continued to strengthen as the market came to embrace our view that crisis in the peripheral nations would not destabilize the Eurozone, or lead to the end of the euro as a currency. The yen, despite a brief safe haven rally, fell by the end of the period.

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4th Quarter 2010

As readers of our past commentaries know, throughout 2010 we increasingly positioned portfolios for a global recovery. As a result, we entered the quarter with significant positions in the Canadian and Australian dollars relative to our benchmark. While these positions played an important role in our positive return vs. the benchmark, our underweight to the euro (the worst performing currency in our solution set) also made a contribution to outperformance.  

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3rd Quarter 2010

Strong 3rd quarter returns belie the considerable volatility that has swept currency markets throughout the year.  The first half of the year witnessed a rally in the dollar and a decline in the value of most major currencies, as crisis in Europe (among other places) precipitated capital flows to U.S. Treasuries and the dollar.  As crisis in Europe abated, and investors began to focus on the stable (if not healthy) outlook for the world economy, the safe haven appeal of the dollar faded.  Investors began to weigh the strong growth outside of the U.S. more heavily in their calculus, and sold dollars for growth oriented currencies.

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2nd Quarter 2010

In our last commentary we offered that the major free float currency markets would remain in a tug of war:

• The dollar would rally and the yen would outperform when stocks fell and the Eurozone debt crisis moved to the fore.
• The dollar would likely fall when stocks stabilized, the demand for safe haven assets diminished, and the market focused on a Federal Reserve on hold.

At the start of the 2nd quarter our position reflected a belief that monetary and fiscal stimulus will work over time (our overweight towards commodity currencies), that safe haven moves would nonetheless occur (a modest overweight to the yen as an insurance policy and stabilizer), and concerns about the euro would remain considerable (a large underweight to the euro).

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1st Quarter 2010

In our prior commentary, we highlighted the following themes:

• Economic and financial headwinds in the Eurozone
• Overpriced risk assets
• The need for a defensive position

During the first quarter we continued to maintain a defensive posture in our strategy.  We further reduced our exposure to the euro.  Impressed by the resilience of the Canadian economy, the recovery of its commodity export markets, and the strength of its financial system, we increased exposure to the Canadian dollar.  The Canadian dollar is increasingly serving two roles in our portfolio strategy: fulfilling both its original function as a commodity beneficiary as well as evolving into a safe haven currency.

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4th Quarter 2009

The Samson Multicurrency Plus strategy significantly outperformed the benchmark in 2009.  Our decision to hold meaningful positions in commodity currencies such as the Australian dollar, Norwegian krone, and Canadian dollar were major contributors to our outperformance for the year.  As readers of our prior letters to investors may recall, our decision to hold significant investments in the commodity currencies reflected our fundamental view that the monetary and fiscal policies pursued by the world’s major governments would successfully lead to a stabilization of the global economy.  As a result, we also maintained modest or underweight positions for most of the year in safe haven currencies like the Swiss franc and the Japanese yen.  Given the poor performance of these currencies for the year, it can be said that our underweights also played an important role in outperformance.

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3rd Quarter 2009

The Samson Multicurrency Plus strategy significantly outperformed the benchmark for the first nine months of 2009.  The 3rd quarter was a particularly strong period for the strategy both on an absolute and relative return basis.  While we are pleased to report good news about performance to clients, we are particularly pleased to give investors an update on the enhancement to the strategy that we announced in our last letter.

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2nd Quarter 2009

Near the end of the 2nd quarter, warning signs began to appear that economic fundamentals were not keeping up with the market’s expectations for recovery.  Forward looking market indicators that signaled growth, such as corporate bond spreads, equity market performance, or commodity returns, began to stall or fade.  In this context, as we rebalanced our currency strategy at the start of the 3^rd quarter in line with our new benchmark, the Federal Reserve Major’s Index, we moderated our growth tilt by pulling back Canadian exposures relative to the benchmark, and increased our safe haven allocation to yen and Swiss francs closer to neutral for the first time in many months.

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1st Quarter 2009

We believe currencies are a separate asset class and an important diversification tool for a well balanced portfolio.  The recent financial crisis underscored the importance of currencies as a separate asset class, as the table below highlights.  Many investors have viewed their foreign stocks as the source of their currency diversification, however, although currencies had their own troubles as the dollar rallied in recent months, foreign stocks generally did worse.  We view our strategy as a long-term asset allocation building block that also offers our clients a tool for diversification.  In that context, our strategy continues to perform its role admirably.

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4th Quarter 2008

In our last commentary, we observed that long-term changes in the direction of the dollar are often related to changes in presidential administrations.  Yet, when a change in administration occurs in the midst of a great economic crisis, the probability of an activist economic policy change rises, and the possibility that the value of the dollar will be affected must increase as well.

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3rd Quarter 2008

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2nd Quarter 2008

During the second quarter of 2008, the U.S. dollar appeared to stabilize as signs of crisis abated and markets appeared to calm.  In this environment, the modest dollar rally, muted as it turned out to be, led to a negative total return for our benchmark.  While we outperformed the benchmark by a modest amount net of fees, this benchmark-like performance masked the shifts in currency strategy that occurred as we began to position our portfolios for an environment where financial markets were healing, and the Fed’s easing cycle began to support domestic and foreign growth.

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1st Quarter 2008

During the first three months of 2008, the U.S. dollar fell sharply as the deteriorating housing market, a domestic credit market crisis, and falling domestic equity prices all contributed to a flight of capital away from the greenback.  An aggressive easing campaign by the Federal Reserve to stabilize markets and the economy only reduced support for the dollar.

We have long offered that currencies should be viewed as an asset class and that an allocation to high quality currencies should be included in an investor’s portfolio as a prudent diversification measure.  The three month period ending March 31st was an instructive reminder of this point.  While many asset classes and sectors experienced negative returns, the Samson Multicurrency Plus Strategy, achieved healthy returns and considerable outperformance versus the calculated inverse of the USDX®.  Our active currency selection process played a critical role in outperformance versus the benchmark and accounted for most of our excess returns.

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4th Quarter 2007

In the last quarterly commentary we outlined several themes:

• Our continued concerns about long-term trends in the value of the dollar;
• Intermediate concerns that markets would continue to be buffeted by a tug of war between a weakening U.S. economy and healthy growth outside of the U.S.;
• And, our strategic decision to have an overweight allocation to safe haven currencies.

These themes shaped the contours of currency market relative performance and the currency asset class a whole.  During the 4th quarter, as the U.S. financial crisis deepened, we increased our allocations to safe haven currencies such as the Swiss Franc and the Japanese Yen (please see the pie charts on the right).  Our combined allocations to these currencies rose from 30% of the strategy to 34%.  The benchmark’s combined allocation to these currencies is 17%.

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3rd Quarter 2007

By the beginning of the 3rd quarter, we had positioned portfolios for a world in economic conflict.  As we explained in the 2nd quarter 2007 commentary, we believed currency markets would likely be caught in a tug of war between the forces of strong global growth outside of the United States, and growing concerns about the condition of America’s economy.  In this framework, our allocations to the Canadian and Australian dollars (natural resource-driven currencies) were designed to position the Strategy for the strong growth we expected outside of the U.S.  Our allocations to the Swiss Franc and the Japanese Yen (flight to quality currencies) were intended to insulate the Strategy from the volatility that we believed could be unleashed by a flight to quality event sparked by the U.S. housing crisis.  While our July 25th commentary did not suggest a financial panic would occur in August, we did observe the possibility of rising volatility, falling equity markets, and the probability that in such an environment, the Fed would no longer pursue a restrictive policy.  This, we explained, would likely accelerate a decline in the value of the dollar.

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2nd Quarter 2007

Both our currency selection strategy and short duration sovereign management strategy played important roles in the outperformance of Samson’s Multicurrency Plus Strategy.  Developing economies like China are robust and seemingly accelerating.  The forces unleashed by these industrializing economies favor renewed allocations to commodity-linked currencies.  Thus, while we entered the second quarter with only modest allocations to the Canadian dollar and no exposure to the Australian dollar, in the first days of the quarter we made significant purchases of the Canadian dollar, followed up with an allocation to the Australian dollar.

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