Appian Monthly Monitor April 2015

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Currency Notes

Currency moves have the potential to make significant impact on investor returns. Even thus far in 2015 we have seen some material moves.

As a case in point, of the 13% return that the US equity market has delivered to Euro-based investors in this first quarter, it has practically all come from the appreciation of the US dollar. The UK isn’t that far behind as Sterling has added just over 7% to the returns when looked at in Euro terms. Clearly there are times when currency moves can eat into returns but as the Euro has generally been weaker over the past 12 month or so, currency trade-winds have been positive.

The first quarter of 2015 has been very rewarding for Appian investors:

Appian Value Fund +7.64%

Appian Equity Fund +12.93%
Appian Small Company Fund +11.58%

At Appian our investment philosophy is typically to be fully exposed to the currency of the underlying asset and we do not consider hyper-active currency management as part of our core skill set.

We are of course very aware of currency moves and how they may affect our views and positions.The stronger US dollar will have a negative impact on US corporate profits which are seeing some downward revisions and indeed on the economy overall through weaker export growth as the Federal Reserve noted in last set of minutes in March. This may in turn influence the US Central Bank as it weighs up the timing for its first interest rate increase.

On the other hand, the weakening we have seen in the Euro will have a positive impact on Eurozone growth and on Eurozone company profits, as it was very much intended to do so by the ECB’s monetary policy. This more competitive exchange rate is one of the channels through which we will see, in our view, a better Eurozone economy along with the impact of QE and the drop in energy costs.

We do consider these factors in arriving at our overall view on the major asset classes such as equities and bonds but we focus on the fundamentals of the investment case at all times. For example, we would never own a US stock purely on a currency view.

Within the Value Fund where we may have on occasion significant cash allocations we will look to have the optimal mix of currency exposures both from a diversification and opportunity perspective. For example in mid-2014 we added to our US dollar exposure following the ECB’s policy statements and also took some exposure to Swiss francs on the basis that the “peg” was unsustainable. We view this approach to our cash management as a good diversifier and value builder for the overall fund.

As to where currencies go for the rest of this year, we still see Central Banks being centre stage and interest rate policy moves in the US and Eurozone likely to dominate. Higher rates in the US should support the US dollar but upward surprises in Eurozone growth may play more of a role than the consensus currently thinks. In the UK it’s clearly the political cycle which will dominate Sterling’s fortunes in the medium term.

Currencies will, over time, ebb and flow and we always are fully cognisant of this, but at Appian our investment focus remains constant - building portfolios of quality assets at reasonable valuations.

Forward

WARNING: The value of your investment may go down as well as up. Past performance is not a reliable guide to future performance. These investments may be affected by changes in currency exchange rates.

Appian Asset Management is regulated by the Central Bank of Ireland. No part of this document is to be reproduced without our written permission. This document has been prepared and issued by Appian Asset Management on the basis of publicly available information, internally developed data and other sources believed to be reliable. It does not constitute an offer or an invitation to invest, or the provision of investment advice. No party should treat any of the contents herein as advice in relation to any investment. While all reasonable care has been given to the preparation of the information, no warranties or representation express or implied are given or liability accepted by Appian Asset Management or its affiliates or any directors or employees in relation to the accuracy fairness or completeness of the information contained herein. Any opinion expressed (including estimates and forecasts) may be subject to change without notice.