Morningstar conference: Currencies may improve risk-adjusted returns of a portfolio
Morningstar Alternative Investment Strategist Nadia Papagiannis summarizes portfolio manager Axel Merk's presentation at Morningstar's ETF conference:
Part I: Currencies may improve risk-adjusted returns of a portfolio
Currencies can improve the risk-adjusted return of a portfolio because of their low correlations to other asset classes. When buying or selling a currency, one pairs one currency against another (AUD versus NZD, for example), and that relative relationship is unlikely to exist in a traditional portfolio of stocks and bonds, providing the low correlation. One could alternatively gain exposure to currencies by trading baskets of equities of one country versus another, but more risk is introduced. For example, buying Chinese equities is significantly more volatile than buying the yuan. Also, because many international companies are selling to the U.S. consumer, their stocks tend to highly correlate to each other as well as to domestic companies.