Case Study: How A Currency Management Strategy Can Work as A Diversifier

Executive summary:

  • The ARCS strategy is a currency management strategy that gives a diversified exposure to three factors: Carry, Value and Trend
  • This strategy has a low or sometimes even negative correlation to traditional assets. This allows it to enhance multi-asset portfolio returns with modest or no additional risk.
  • We believe the future return prospects of ARCS also look decent. This is because two indicators of the strategy's forward-looking return potential have improved in recent years and sit above their historical average. These indicators relate to the ARCS Carry and the ARCS Value factors.

Currency management is an often-overlooked aspect of multi-asset portfolio management. However, investors can potentially add value by incorporating a currency strategy into their portfolio. The challenging experience of 2022 for capital markets, is a case in point. At its low point in October 2022, a 60-40 U.S. stock-bond portfolio had fallen by more than 20% from where it started the year.