Independent Thinking®
Q&A with Blackrock’s Orlando Montalvo
July 15, 2015
Editor’s note: Evercore Wealth Management supplements its core investment capabilities with carefully selected external funds across the range of the firm’s asset classes. Here we interview BlackRock Director Orlando Montalvo about the BlackRock iShares Currency Hedged MSCI Germany ETF (HEWG). The fund tracks the investment results of an index composed of large- and mid-capitalization German equities while mitigating exposure to fluctuations between the value of the euro and the U.S. dollar.
Q: German stocks have gone up a lot in the last year and the euro currency has fallen significantly over that time period. What is your outlook for this particular strategy now?
A: We believe the European Central Bank’s unprecedented bond buying program could continue to serve as a boon for European equities while maintaining downward pressure on the euro. As one of the stronger economies in the region, Germany represents an attractive way of accessing the driving force behind Europe’s momentum.
Q: What are the drivers of currency values?
A: Fluctuations in the foreign currency markets and capital flows between countries can be driven by interest rate differentials, and monetary and fiscal policies, as well as supply and demand equilibrium.
Q: What is the case for investing in a currency-hedged ETF?
A: Over long periods of time, the currency impact on international assets may be neutral. Over shorter horizons, however, the currency impact on international assets can be substantial. Investing in overseas assets introduces currency volatility into the portfolio, which can contribute to more volatile overall portfolio returns.
Currency hedging seeks to minimize the effect of currency fluctuations on the domestic value of investments, shielding the investors from changes in currency exchange rates and helping them achieve returns closer to those of the local market. The hedging decision is based on the belief that currency exposure adds volatility risk to a portfolio without the expectation of corresponding return in the long term.
Q: How are the returns of the underlying investment impacted by the currency hedge?
A: By implementing a currency hedge on a particular portfolio, the currency volatility is largely eliminated from the underlying investments. As a result, the investors can earn a return more purely from the underlying investments.
Q: What are the associated risks?
A: There are several risks associated with any currency overlay products. One of the most important to consider is counterparty risk. At BlackRock, we take a proactive approach in managing counterparty risk by keeping the duration of our contracts to one month. Our dedicated risk analytics group continuously evaluates each and every exposure to ensure that we are well-informed and prepared to act as market conditions change.
Q: In which circumstances would it be better to invest directly in a foreign stock market with currency exposure?
A: Investors who have strong convictions on currency direction may find it beneficial to take on such currency exposure.
Q: How does BlackRock’s execution in the currency hedged ETF space differ from that of your competitors?
A: From a passive currency perspective, BlackRock manages all hedges to a specific index; the goal is to eliminate currency exposure to a portfolio while maintaining low transaction costs. We also provide our investors with choices (both hedged and unhedged) to express their own views. BlackRock uses a unique fund-of-fund structure that incorporates an unhedged iShares ETF and a one-month currency forward basket. This structure affords us enhanced liquidity and more efficient trading. By having a hedged and an unhedged fund with the same equity exposure, clients can customize and create an optimal hedge ratio.
For further information on the Evercore Wealth Management Efficient Architecture® approach to asset allocation, please contact Stephanie Hackett at [email protected].