Are All Currencies Created Equal?
May 2017
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Are All Currencies Created Equal?
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The value of a currency is determined by its comparison to another currency. Investopedia
Foreign exchange markets are notoriously difficult to decipher. Macroeconomic events, inflation concerns, interest rate
expectations, economic growth and international trade, not to mention high frequency traders and speculators can all influence
the value of a currency. This multi-faceted nature of currency markets can leave private client investors scratching their heads
when trying to understand whether or not they have received a decent investment return.
Currencies are required to perform two functions for investors that are not necessarily complementary: act as a unit of account
and provide a store of value. The unit of account function is expressed by an investor selecting their “base” or “reference”
currency. Portfolio returns are then calculated in that chosen currency and, perhaps more importantly, variability of returns is
calculated based on valuations in that chosen currency. In this narrow function of acting as a unit of account, it is accurate to say
that “all currencies are created equal”.
However, currencies are also required to provide a store of value and, in this regard, it certainly feels as if not all currencies are
created equal. So is there any evidence that choice of currency as the unit of account by an investor has a material impact on
their global buying power over anything more than the short term?
The title of this article echoes the opening words of the American Declaration of Independence and it is the US Dollar that has
been the strongest currency over the last few years, having appreciated significantly against Sterling, the Euro, the Canadian
Dollar and even against the Swiss Franc over the last three years. In other words, a dollar today will get you more bang for your
buck than it did 3 years ago. The table below provides the figures.
3 Year Currency Return in % terms
Relative to USD
GBP
USD
EUR
CHF
CAD
(24.9)
-
(22.5)
(11.6)
(17.2)
Does this change in the relative price of currencies mean, for example, that returns for a Sterling investor have been some 25%
lower than those for a US Dollar investor? If the investors held cash over the period, yes it does. However, most investors hold a
basket of cash, bonds, equities, property, hedge funds and other alternative investments. How have private client investors who
chose US Dollars as their unit of account fared against those who chose other mainstream currencies?
The ARC Private Client Indices, which provide a proxy for the average private client investment experience across four different
risk profiles and five different currencies, provide a framework for assessing this question.
3 Year Returns in Local Currency
ARC Private Client Index Name
GBP
USD
EUR
CHF
CAD
ARC Cautious PCI
12.0
4.9
5.7
4.4
11.2
ARC Balanced Asset PCI
17.8
6.1
9.9
9.5
16.7
ARC Steady Growth PCI
23.2
7.6
16.0
13.1
20.5
ARC Equity Risk PCI
25.6
8.8
19.6
16.0
21.6
The table above sets out the average returns achieved by discretionary investment managers for investors across the four ARC
PCI risk categories in local currency terms. Note that the returns for US Dollar investors are the lowest in absolute terms and that
also the spread of returns across the four risk categories is the lowest.
© Asset Risk Consultants Limited, 2017
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Q1 2017 Commentary
Are All Currencies Created Equal?
Report
The table below presents the same data with the figures recalculated in US Dollar terms. The results are striking. Euro and
Sterling based investors have experienced negative returns across all four risk categories in US Dollar terms. By way of example,
a private client with a Sterling denominated portfolio in the ARC Steady Growth risk category would have recorded a return of
23.2% in Sterling terms but seen that portfolio’s buying power in US Dollar terms decline by 7.6%.
3 Year Returns Rebased into US Dollars
Private Client Index Name
GBP
USD
EUR
CHF
CAD
ARC Cautious PCI
(15.9)
4.9
(18.0)
(7.7)
(8.0)
ARC Balanced Asset PCI
(11.6)
6.1
(14.8)
(3.2)
(3.4)
ARC Steady Growth PCI
(7.6)
7.6
(10.1)
0.0
(0.3)
ARC Equity Risk PCI
(5.7)
8.8
(7.2)
2.5
0.6
However, what the table also reveals is that the impact of US dollar appreciation becomes more muted as the risk profile of
portfolios rises. Even for equity portfolios, over-weight exposure to domestic companies seems to cause a relative performance
impact but it is nowhere near as severe as for lower risk portfolios.
Looking at the impact of the selection of reference currency over last three years, the following conclusions might be drawn:
Choice of reference currency has a greater impact on “global purchasing power” than choice of investment risk profile;

and
The impact of choice of reference currency declines as the equity content of the portfolio rises.

But, surely three years is too short a period upon which to base an investment decision? What happens if a longer period is
examined; such as the ten years ended March 2017? The charts below show the evolution of returns over time in local currency
(left) and also in US Dollar terms (right) of private client portfolios classified by ARC as having a “Steady Growth” risk profile.
Cumulative Returns
Cumulative Returns
percent
percent
60
40
40
20
20
0
0
-20
-20
-40
{}
Mar -09
Mar -11
Mar -13
Mar -15
Mar -17
{}
Mar -09
Mar -11
Mar -13
Mar -15
Mar -17
US Dollar Cash
ARC Sterling Steady Growth PCI
US Dollar Cash
ARC Sterling Steady Growth PCI
ARC Euro Steady Growth PCI
ARC US Dollar Steady Growth PCI
ARC Euro Steady Growth PCI
ARC US Dollar Steady Growth PCI
ARC Swiss Franc Steady Growth PCI
ARC Canadian Dollar Steady Growth PCI
ARC Swiss Franc Steady Growth PCI
ARC Canadian Dollar Steady Growth PCI
Based on the 120 months ended Mar -17
Based on the 120 months ended Mar -17
Over ten years, the data suggests that there have been two currency groupings post the global financial crisis: USD; CAD; CHF
versus EUR; GBP. In US Dollar terms, private client investors in EUR and GBP have not seen any growth in the value of their
portfolios over the last ten years. However, those who selected one of the stronger currencies of USD; CAD and CHF have seen
their wealth grow by 30-40% over the period.
© Asset Risk Consultants Limited, 2017
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Q1 2017 Commentary
Are All Currencies Created Equal?
Report
The chart below plots all four ARC PCI in each of the five currencies in risk/return space, each index having been translated into
US Dollar terms. The results support the observations made on the three year data, namely that the choice of reference
currency has had a greater impact on “global purchasing power” than choice of investment risk profile and that the impact of
choice of reference currency declines as the equity content of a portfolio rises.
Return vs Risk (120 months )
Mean Return (per cent per annum)
5
4
3
2
1
0
0.0
0.2
0.4
0.6
0.8
1.0
1.2
Risk relative to World Equities
ARC Sterling Cautious PCI
ARC Sterling Balanced Asset PCI
ARC Sterling Steady Growth PCI
ARC Sterling Equity Risk PCI
ARC Euro Cautious PCI
ARC Euro Balanced Asset PCI
ARC Euro Steady Growth PCI
ARC Euro Equity Risk PCI
ARC US Dollar Cautious PCI
ARC US Dollar Balanced Asset PCI
ARC US Dollar Steady Growth PCI
ARC US Dollar Equity Risk PCI
ARC Swiss Franc Cautious PCI
ARC Swiss Franc Balanced Asset PCI
ARC Swiss Franc Steady Growth PCI
ARC Swiss Franc Equity Risk PCI
ARC Canadian Dollar Cautious PCI
ARC Canadian Dollar Balanced Asset PCI
ARC Canadian Dollar Steady Growth PCI
ARC Canadian Dollar Equity Risk PCI
Conclusions
Currencies create challenges for investors as choice of “unit of account” has a material impact on “global purchasing power”
even over relatively long investment time horizons. In the last ten years it is evident that not all currencies provided a store of
value. Some currencies have been more equal than others!
However, there is a third use of money, providing a medium of exchange, which should perhaps dominate the choice of
reference currency by an investor. What currency will the money be spent in? That leaves asset allocators and investment
managers with the challenge of working out how to smooth income without compromising global wealth preservation. And in
that area the last ten years of data suggests that there is much work yet to be done.
For further information:
Graham Harrison, Managing Director, +44 (0) 1481 817777, [email protected]
A full list of Data Contributors to PCI is available at www.suggestus.com
© Asset Risk Consultants Limited, 2017
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Q1 2017 Commentary