IQ INSIGHTS - SSGA · 2015-09-30 · Figure 3 attributes performance during the euro bear market,...

Currency hedging has become an increasingly important consideration for euro-based investors since the middle of 2014. The motivation is clear. An unhedged investment in the MSCI World Index would have earned over 11% in euro terms since 30 June 2014, while an investment in the same benchmark but fully hedged back to the euro would have seen those gains translate to a loss of 2.8%.

Notwithstanding the potential for such gaps in returns, pension investors are typically less compelled to leave investments in non-local currencies unhedged. The argument for this is that the 15 months highlighted in Figure 1 is a short period in the context of pension investing and that over the long term, pension investors’ foreign exchange (FX) risk is not rewarded; FX returns simply wash out over time.

By hedging the FX exposure, the volatility of the funding ratio is therefore reduced and returns over the long-term horizon would be similar to the unhedged equivalent. Some Dutch pension funds typically hedge most of their Developed Markets (DM) currency exposure while leaving Emerging Markets (EM) exposures unhedged. Overall, this captures around 80% of the total FX exposure while trading costs are kept at a minimum.

However, our analysis as detailed in this paper does not accept that currency returns wash out over the long run. We examined the effectiveness of the above-described passive hedging policy and compared it to a value-based Dynamic Strategic Hedging (DSH) approach developed by State Street Global Advisors.

The core practice of hedging a large proportion of foreign currency exposure is sound, yet its success (failure) runs in long cycles (7+ years) and varies greatly across individual currencies. The DSH strategy refines the simple passive approach to respond to the long-run valuation cycle and recognises the significant differences in risk and hedging costs across currencies. In doing so, the DSH seeks to deliver better and more consistent hedging results in terms of risk reduction and return.

Our analysis leads us to conclude that:

• There is strong evidence that currency returns do not wash out in the long run. Hedging 100% places too much confidence in the premise that currency returns do revert to zero.

IQ INSIGHTSStrategic Thinking for Flexible Currency Hedging

December 2015

Figure 1: Impact of Currency Hedging, June 2014–September 2015

-5

0

5

10

15

20

25

30

Jun2014

Nov2014

Apr2015

Sep2015

11.3%

-2.8%

Return (%)

— MSCI World (100% Hedged to Euro) — MSCI World (Euro)

Source: SSGA /Bloomberg as of 30 September 2015.

Past performance is not a guarantee of future results.

Index returns are unmanaged and do not reflect the deduction of any fees or expenses. Index returns reflect all items of income, gain and loss and the reinvestment of dividends net of withholding taxes and other income.

by Aaron R. Hurd, FRM, Portfolio Manager, Currency Group and Hélène Veltman, Ph.D, Portfolio Strategist, Investment Solutions Group

Marketing Communication

State Street Global Advisors 2

IQ Insights | Strategic Thinking for Flexible Currency Hedging

• Unhedged Developed Markets currency exposure provides some diversification benefit, but always hedging 100% forfeits these benefits.

• EM currency introduces sizeable volatility and negative diversification effects. Remaining completely unhedged precludes the management of these higher risks.

• EM and small DM markets are incredibly diverse. Treating them as a single block when setting currency hedging policy results in inefficient solutions.

Long Run PerspectiveThe long run is typically defined as encompassing the business cycle, which is around 10 years. For pension funds, the long run might reasonably be defined as the liability horizon that the portfolio is intended to fund, which can be around 10–20 years.

We find that over periods of 7–10 years, currency returns have not historically reverted, so do not wash out; the impact can be dramatic. This is well illustrated in Figures 2 & 3, where we separate out the currency performance of the MSCI World ex-EMU Index from that of the equity contribution.

These two charts highlight how much currency can dominate equity returns over seven-year horizons.

Figure 2 pertains to the euro bull market from 2001–2008. We see that the unhedged MSCI World ex-EMU benchmark lost 35.5% which is comprised of a 7.5% equity gain plus a very substantial loss of 43.1% in foreign currency. Clearly, currency was a major risk to the international investment and rivalled the magnitude of equity returns. A 100% currency hedge would have delivered healthy positive returns throughout this period.

Figure 3 attributes performance during the euro bear market, beginning in 2008. Again, we see currency playing a dominant role; it explains almost 59% of the 88.5% gain in the unhedged

index. A 100% currency hedge would have lost steadily through the period, requiring regular monthly or quarterly cash payments to cover the losses.

Overall, we observe that currency risk can be very substantial over long periods. Investors setting a strategic currency policy may experience prolonged periods of loss and uncertainty. Patience is required to stick with the 100% hedge. Just as the long-run return and asset class assumptions are periodically updated in Asset and Liability Management (ALM) studies, it may make sense to also have an evolving assessment of the risk/reward from currency over similar strategic horizons.

Do Currency Returns Wash Out in the Long Run?In the previous section, we highlighted the patience required to maintain hedging policies during 7–10 year periods of underperformance. Much of that resolve is built on a belief that

Figure 2: MSCI World xEMU Performance Attribution May 2001–June 2008%

-40

-20

0

20

May2001

2003 2004 2006 Jun2008

-60

40

7.5%

-35.5%

-43.1%

— Equity Return — Effective Currency Return— Unhedged Equity Return

Source: SSGA/MSCI/Bloomberg.



Figure 3: MSCI World xEMU Performance Attribution June 2008–June 2015%

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0

40

80

Jun2008

2010 2011 2013 Jun2015

-80

120

58.6%

88.5%

29.9%

— Equity Return — Effective Currency Return— Unhedged Equity Return

Source: SSGA/MSCI/Bloomberg as of 30 June 2015.



Figure 4: BOE Euro Nominal Effective Exchange Rate

70

80

90

100

110

120

Jan1975

1985 1995 2005 Jun2015

7 Years

5 Years

8 Years

8 Years

7 Years?

Source: Bank of England/Bloomberg as of 30 June 2015. The BOE uses the relative weights of the legacy European currencies to backcast a synthetic effective exchange rate series to the beginning of the period of floating exchange rates in the mid seventies. This is a trade weighted index which will differ from the typical weights in a portfolio of financial assets, but the major cycles are similar.



currency returns wash out over the long run. SSGA’s currency team does not believe that those returns revert to zero in the long run.

To explore the assumption of reversion to zero, we can look back at the history of the euro as a single time series. We can also look at the experience of other currencies.

Over the past 40 years, the euro return did revert to zero, but only twice; maybe three times if we are generous in interpreting the chart in Figure 4. But can meaningful predictions be made from just two or three historical observations that future returns will revert to zero? Was it just luck?

We would really need 25–30 observations, or around 300–400 years of data, to draw statistically significant inferences about the likelihood of future reversion. In the absence of such data, we can expand our data set by looking at other currencies to see if they reverted to zero over dependable cycles.

In Figure 5, we see that the AUD, JPY, GBP, and an MSCI Emerging Markets (EM) market cap weighted basket of EM currencies displayed persistent positive or negative returns which have not reverted for periods in excess of 15 years. Perhaps they will revert to zero; however, we would be considering a cycle length of 20–30+ years, which would clearly count as the long run given the liability duration of many plans.

Just as important is the fact that currencies can change behaviour over time. For example, AUD and JPY traded in a very tight range for the first decade before diverging for 15 years. Simple rules to hedge 100% of certain currencies and 0% of others may not be reliable.

Ultimately, the time series history is simply too short to make a remotely meaningful forecast that EUR will revert to zero over the long run. Even looking at a cross-section of currencies to gain additional insights provides evidence that EUR returns may not revert and that their tendency to revert is inconsistent over time.

It is very important to move beyond a simple, passive hedging strategy and to consider currencies on an individual basis. Moreover, we favour a strategy which is able to evolve over time to help protect against the changing profiles and behaviours over strategic horizons.

Currency Diversification and HedgingThe tendency of returns to foreign currency not to revert to zero over time led us to question the efficacy of a simple all-or-nothing approach to hedging certain groups of currencies. It is also important to consider whether the potential diversification benefits of hedging are undermined by hedging DM currencies at 100% and EM currencies at 0%.

Figure 6 plots the standard deviation of the MSCI World ex-EMU and MSCI EM equity indices as the FX hedge ratio increases from 0% to 100%. The FX hedge ratio is defined as the ratio of the hedged FX amount and the total FX exposure. A 0% hedge ratio corresponds to fully unhedged while a 100% hedge ratio correponds to a fully hedged currency exposure.

The light blue line shows that the maximum risk reduction is delivered at a 50–60% FX hedge ratio. Beyond that point, the sacrifice of diversification benefits leads to more harm than good. At a 100% hedge ratio, the hedged index has nearly the same level of risk as the unhedged index.

The tendency for JPY, USD, and CHF to perform well during major risk events should help to diversify global equity risk for a euro-based investor. Conversely, we would expect higher-risk EM currencies to underperform the euro during such periods and outperform during more ‘risk-on’ phases. As a result, we can see that the risk of the EM index is minimized at a 100% hedge ratio and that the scale of the risk reduction is much larger.

Figure 5: Cumulative Forward Currency Returns vs. Euro%

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0

40

80

Aug1989

1996 2002 2009 Aug2015

+63%

+43%

-32%

+90%

-80

120

— GBP — JPY — EM Weighted Average— AUD



Figure 6: Risk Reduction from Currency Hedging

%

% %

0 25 50 75 100

14.8

14.3

13.8

13.3

12.8

22.0

20.0

18.0

16.0

14.0

— MSCI World Emerging Markets Index— MSCI World ex-EMU Index

Source: SSGA /Bloomberg. Based on data from 31/1/1999 to 30/6/2015.

For illustrative purposes.



Overall, we consider that the diversification properties of currency relative to equity investments weakens the case for hedging 100% of the major developed markets currencies and suggests some benefit to hedging some portion of the EM currency exposure.

As an introduction to alternative methods for hedging currency risk we explore the case for hedging emerging markets currencies in more detail.

Purchasing Power Parity: A Model of Long Run Currency EquilibriumIn the next two sections, we discuss the management of Emerging Markets currencies and SSGA’s committment to value-based hedging, which we refer to as Dynamic Strategy Hedging (DSH). In that context, we will introduce 1) our understanding of the sources of currency returns over the long run and 2) the centrality of Purchasing Power Parity.

Characterising foreign currency as foreign cash deposits reminds the investor that currency returns incorporate the impact of both the interest paid on cash deposits and the changes in the exchange rate. (Of course, foreign cash could be held in a non-interest bearing mattress and be subject only to exchange rate moves, but at an institutional level this is not plausible.)

The interest rate effect, generally referred to as interest rate carry, can be substantial. Yet it is relatively easy to observe and tends to be well understood as a source of return of foreign cash. To understand the spot exchange rate and its impact on returns however, a framework can be useful.

PPP Fair Value

SSGA’s currency team believes in the long-run effectiveness of Purchasing Power Parity (PPP) fair value models. PPP models are built around the hypothesis that prices should equalize after adjusting for exchange rates. Countries with high inflation should generally experience falling exchange rates relative to countries with lower inflation. If that exchange rate equilibration fails to happen, the same goods and investments become expensive or cheap in one country compared to others. The resulting loss/gain in relative competitiveness across countries will lead to shifts in capital flows and trade, contributing to global imbalances and potentially disruptive pressures to growth and inflation in individual countries. In short, PPP is an equilibrium condition in the sense that if it fails to hold, powerful economic forces will eventually result in something breaking down to restore the equilibrium. A simple example may prove instructive:

Unlike many theories of economic and financial market equilibrium, we can see the equilibrating forces of PPP happen in real time. For example, a few years ago the Canadian dollar was extremely overvalued on a PPP basis. One result of this was a surge of Canadian shoppers into the US to buy cheaper consumer goods. Admittedly, it takes a large number of flat

screen televisions to move the exchange rate back to equilibrium, but we also saw large companies such as US auto makers shift production and choose to make fresh capital investments in the southern US and Mexico. These capital allocation decisions amounted to billions of US dollars and the companies specifically cited the high cost of doing business in Canada due to the exchange rate.

In a more extreme example, Venezuela is currently attempting to hold its official currency rate at a level that is inconsistent with PPP. The resultant impact on competitiveness, inflation, interest rates, capital flows, and trade flows has created crisis conditions and a thriving black market in the bolivar; the currency trades much closer to its PPP equilibrium level in the black market. The forces at play in maintaining PPP equilibrium are readily observable and very powerful indeed.

In the next two sections, we apply our understanding of PPP and interest rate carry to better understand the risks/rewards of currency and informed hedging policy.

Currency Risk in Emerging Markets Equity PortfoliosSSGA’s Currency Group does not recommend a static, passive hedge on emerging markets currencies. Emerging markets currencies can be very risky. However, high carry costs (high embedded risk premium) in emerging markets currencies make hedging prohibitively expensive at this time. In our view, the expected return to these EM currencies reasonably justifies the risk.

By plotting the historical interest rate differential between the euro and the currency basket embedded in the MSCI Emerging Markets Index, we can see that the differential has been consistently positive. This suggests a consistent and meaningfully positive risk premia.

Although SSGA does not recommend a static, passive EM currency hedge, that does not mean EM currency risk should be ignored. We believe EM currency risk should be managed carefully on a currency-by-currency basis. Emerging markets are often treated as a single block even though the dispersion of risk, interest rate carry, and valuations within EM is often dramatic. Perhaps the stark differences across EM currencies are relatively apparent across regional blocks, but even within regions the differences are large.

Figure 7: MSCI Emerging Markets Market Cap Weighted Interest Rates less EUR Interest Rates Interest Rate Differential (%)

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8

12

16

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Jan1999

Feb2003

Mar2007

Apr2011

Jun2015

Source: SSGA/MSCI/Bloomberg as at 30 June 2015. For illustrative purposes.



Asia

At first glance, there appears to be a consistency across Asian currencies in Figure 8. With the exception of Taiwan’s currency, all are overvalued and have positive interest rate differentials. However, the magnitude of the differentials is significant across currencies and we believe those differences should meaningfully impact the hedging decision.

For example, the Thai baht (THB) is nearly 18% over our estimate of fair PPP value and yet the interest rate carry is very low. We would argue that THB should be hedged at a high hedge ratio because the expensive valuation suggests greater downside risk which could be hedged away at a reasonable cost, given the relatively low interest rate carry. Conversely, the Indonesian Rupiah (IDR) is nearly 6% above our estimate of fair value, suggesting modest downside risk. However, the cost of carry of more than 7% suggests a high risk premia that cannot be hedged at a reasonable price. We would thus favour the argument for under-hedging the IDR currency risk.

Value Based Dynamic Strategic Hedging SolutionsWe have seen that currency returns do not always wash out over the long run, leading to potentially permanent losses from hedging. Moreover, the currencies that have tended to revert may not do so in the future. We have also seen that hedging developed markets currencies at 100% can lead to the sacrifice of diversification benefits while leaving the riskier currencies such as those of Emerging Markets unhedged can lead to increased volatility exposure. SSGA believes the answer is to hedge a large proportion of currency exposure, but to focus the hedges on those currencies where the potential risk reduction is large relative to the cost. We prefer a value-driven hedging strategy based on the principles described in the section on EM hedging.

SSGA’s value-based Dynamic Strategic Hedging strategy (DSH) balances the relative downside risk, interest rate carry, and volatility of each currency individually to set a hedge ratio. In doing so, the strategy seeks to better focus on downside currency risk protection at a reasonable price. As a consequence, it also preserves some upside potential, although the primary focus remains on downside protection. Our research and live track record suggests that dynamic, value-based currency hedging strategies have tended to outperform simple static currency hedges during times of high risk aversion. In other words, the value-based hedge has tended to provide some multi asset tail risk protection. SSGA’s Case for Dynamic Strategic Hedging document provides additional information.

Figure 9 shows that DSH opens the door to cost effective EM currency risk management. Consistent with our estimates of a high embedded currency risk premium, we see that whilst a 50% passive hedge reduced VaR(95%) from -15.07% on an unhedged basis to -11.5%, the cost amounted to more than 110 basis points per year in underperformance (-2.73% + 1.60%). The DSH hedge, assuming a 50% benchmark hedge ratio and

allowing individual currency hedge ratios to vary between 0% and 100%, would have achieved a reduction in VaR to -12.5% with a much smaller performance impact.

Figure 10 shows the clear outperformance of DSH in the developed markets universe. While a 50% passive hedge reduced VaR(95%) from -11.45% on an unhedged basis to -5.37%, it cost 35 basis points per year in underperformance. The DSH hedge, assuming a 50% benchmark hedge ratio and allowing individual currency hedge ratios to vary between 0% and 100%, would have achieved a reduction in VaR to -6.07% and outperformed by 125 basis points per year compared to the unhedged portfolio.

Figure 9: Emerging Markets Currency Hedging Solutions for a Euro Based Investor in the MSCI EM Index, July 1997–September 2015

0% Hedge Ratio 50% Hedge RatioDynamic Strategic

Hedging Strategy

Annual Return (%) -1.60 -2.73 -2.04

Annual Volatility (%) 8.42 4.33 6.68

Maximum Loss (%) -45.34 -51.71 -39.11

95% Value at Risk (VaR), Annual (%)

-15.07 -11.50 -12.51

Information Ratio -0.19 -0.63 -0.31

Source: SSGA/MSCI/Bloomberg as of 30 September 2015. See backtest methodology disclosure for additional information on DSH and the simulation disclosure for further information regarding the passive hedge. Bid/Ask trading cost of 7 bps assumed for EM currencies.

Figure 8: Interest rate differential and over/under valuation relative to PPP%

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20

Over/Under Valuation Relative to PPP Interest Rate Differential

CNY IDR INR KRW MYR PHP THB TWD




As illustrated in Figure 11, we show the value that would have been added during the recent period since June 2014 (the timeframe captured in Figure 1). It represents the excess return of the DSH strategy decisions to vary currency specific hedge ratios between 0% and 100% around a 50% passive hedging benchmark during the defined period.

A Proposed SolutionIn this section, we present a DSH solution as an alternative to the static 80% currency hedged portfolio as mentioned in the introduction. As noted, the largest currency exposures — the USD, GBP, JPY, CHF and CAD — are typically fully hedged, while all other currency exposures (mostly EM) are left unhedged due to cost considerations.

Costs arise from two sources; (i) the bid/ask trading costs and (ii) the cost of embedded currency risk premium. For the purposes of our analysis, we are assuming trading costs to be a standard bid/ask cost of 2 basis points (bps) for developed currencies and a cost of 7 bps for emerging markets currencies. Overall, for an MSCI ACWI—like benchmark, hedging the above mentioned largest currencies leads to around 20% unhedged FX exposure (indicative) in what we term the “Current Solution”.

However, we believe there is a more efficient way to achieve a long-run average hedge of approximately 80% by applying SSGA’s value-based Dynamic Strategic Hedging solution. Specifically, we propose a neutral hedge of 87.5% of all developed market currencies and allow the hedge ratios for specific currencies to vary between 75%–100%, based on the DSH strategy. In addition, we adopt a neutral hedge ratio of 25% for emerging markets currencies and allow the hedge ratio for specific EM currencies to vary between 0%–50%.

Dutch Buffer Requirement for the Proposed Solution

The Dutch regulator (DNB) requires pension funds to keep a reserve, called the buffer requirement, in line with the risk profile of the pension fund’s funding ratio. Any unhedged FX exposure will contribute to the buffer requirement. For a dynamic strategy, such as DSH, the most conservative valuation must be assumed. This is for a hedge ratio of 75% for developed currencies and 0% for emerging currencies. This conservative measure of the risk profile for the Proposed Solution is close to the risk profile of the Current Solution. The impact on the buffer requirement is therefore minimal.

Figure 12 compares the historical currency returns in an Unhedged MSCI ACWI index to the currency returns of the index under the current and proposed hedging solutions.

Figure 12: Comparison of Custom Proposed DSH Solution, July 1997–September 2015

0% Hedge Ratio Current Solution Proposed Solution

Annual Return (%) 0.58 0.25 0.52


Maximum Loss (%) -25.22 -2.10 -3.91

95% Value at Risk, Annual (%)

-9.90 -1.90 -2.10

Information Ratio 0.08 0.25 0.32

Buffer requirement for a sample Pension Fund – for illustrative purposes only (%)

18.4 16.4 16.5

Source: SSGA/MSCI/Bloomberg as of 30 September 2015. See backtest methodology disclosure for additional information on DSH and the simulation disclosure for further information regarding the passive hedge. Bid/Ask costs of 2 bps for DM and 7 bp for EM currencies are included.

Figure 11: : DSH Value Added over 50% Passive Hedge June 2014–September 2015%

1

2

3

5

4

Jun2014

Sep2014

Dec2014

Mar2015

Jun2015

Sep2015

0

6

— MSCI World ex-EMU — MSCI EM


Figure 10: Developed Markets Currency Hedging Solutions for a Euro Based Investor in the MSCI World xEMU Index, January 1990–September 2015

0% Hedge Ratio 50% Hedge RatioDynamic Strategic

Hedging Strategy

Annual Return (%) 0.94 0.59 2.19


Maximum Loss (%) -40.02 -21.98 -14.97

95% Value at Risk, Annual (%)

-11.45 -5.37 -6.07

Information Ratio 0.11 0.14 0.38

Source: SSGA/MSCI/Bloomberg as of 30 September 2015. See backtest methodology disclosure for additional information on DSH and the simulation disclosure for further information regarding the passive hedge. Bid/Ask trading cost of 2 bps assumed for DM currencies.



Conclusions• The impact of currency on developed markets equity

portfolios can be very large, rivaling that of the equity exposure over 7–10 year periods.

• During long cycles simple passive hedging policies tend to experience trend gains/losses, requiring great patience and resolve on the part of investors.

• The value-based DSH strategy allows investors to implement an efficient evolutionary hedging policy which seeks to provide a number of benefits:

– Similar risk reduction as a passive hedge

– Better overall total returns relative to a simple passive hedge

– The possibility of effective EM currency risk management

– The ability to reintroduce some of the diversification benefits of unhedged developed markets currency exposure

• Finally, by tailoring a DSH solution to target the same average level of hedging as the current policy, Dutch clients can enjoy the potential benefits of DSH with minimal impact to their required capital buffer.

1 A Case for Dynamic Strategic Hedging, (February 2015), SSGA.

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Simulation Performance Methodology Disclosure

The simulated performances shown Figures 9, 10 and 12 were created by the SSGA Currency Group. The historical simulated portfolios were created using actual data. Currency returns are calculated by applying the weights of the indices indicated in each table to the spot and forward currency returns over the time period indicated.

The results shown do not represent the results of actual trading using client assets but were achieved by means of the retroactive application of a specified static hedge ratio with the benefit of hindsight. The simulated performance was compiled after the

end of the period depicted and does not represent the actual investment decisions of the advisor. These results do not reflect the effect of material economic and market factors on decision making. The simulated performance data is reported on a gross of fees basis. Additional fees, such as the transaction costs, would reduce the return.

The simulated performance is not necessarily indicative of future performance, which may differ. All SSGA commingled funds pay State Street Bank and Trust Company for services as custodian, transfer agent, and shareholder servicing agent and may pay affiliates of State Street Bank and Trust Company for investment advisory services.

Please contact SSGA for further information regarding this strategy.

Back-tested Performance Methodology Disclosure

The back-tested performances shown in Figures 9, 10, 11 and 12 were created by the SSGA Currency Group. The historical back-tested portfolios were created using SSGA’s proprietary models. Monthly portfolios were created and returns generated were based on the model hedge ratios and respective MSCI Index currency exposure. The Dynamic Strategic Hedging (DSH) Ratio for each local currency is applied to the MSCI Index weight and the currency forward return for said local currency. This is summed across all currencies in the MSCI World ex-US Index and added to the underlying spot return to arrive at the DSH return. The Dynamic Strategic Hedging program was back-tested using data available from January 1st, 1990 to September 30th, 2015. The results shown do not represent the results of actual trading using client assets but were achieved by means of the retroactive application of a model that was designed with the benefit of hindsight.

The back-tested performance was compiled after the end of the period depicted and does not represent the actual investment decisions of the advisor. These results do not reflect the effect of material economic and market factors on decision-making. No representation is being made that any account will or is likely to achieve profits or losses similar to these being shown above. The back-tested performance data is reported on a gross of fees basis, but net of administrative costs. Additional fees, such as the advisory fee, would reduce the return. For example, if an annualized gross return of 10% was achieved over a 5-year period and a management fee of 1% per year was charged and deducted annually, then the resulting return would be reduced from 61% to 54%. SSGA does not manage actual assets to this strategy.

The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA’s express written consent.

Investing involves risk including the risk of loss of principal.

The information provided does not constitute investment advice as such term is defined under the Markets in Financial Instruments Directive (2004/39/EC) and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell any investment. It does not take into account any investor’s or potential investor?s particular investment objectives, strategies, tax status, risk appetite or investment horizon. If you require investment advice you should consult your tax and financial or other professional advisor. All material has been obtained from sources believed to be reliable. There is no representation or warranty as to the accuracy of the information and State Street shall have no liability for decisions based on such information.


© 2015 State Street Corporation. All Rights Reserved. ID5577-EUMKT-4464 1215 Exp. Date: 31/12/2016

“Investing in foreign domiciled securities may involve risk of capital loss from unfavorable fluctuation in currency values, withholding taxes, from differences in generally accepted accounting principles or from economic or political instability in other nations.

Investments in emerging or developing markets may be more volatile and less liquid than investing in developed markets and may involve exposure to economic structures that are generally less diverse and mature and to political systems which have less stability than those of more developed countries.”

Investments in issuers in different countries are often denominated in different currencies. Changes in the values of those currencies relative to the Portfolio’s base currency may have a positive or negative effect on the values of the Portfolio’s investments denominated in those currencies. The Portfolio may, but will not necessarily, invest in currency exchange contracts or other currency-related transactions (including derivatives transactions) to reduce exposure to different currencies. These contracts may reduce, take or eliminate some or all of the benefit that the Portfolio may experience from favorable currency fluctuations.

Diversification does not ensure a profit or guarantee against loss.

Risks associated with equity investing include stock values which may fluctuate in response to the activities of individual companies and general market and economic conditions.

Although subject to the risks of common stocks, low volatility stocks are seen as having a lower risk profile than the overall markets. However, a portfolio comprised of low volatility stocks may not produce investment exposure that has lower variability to changes in such stocks’ price levels

Currency Hedging involves taking offsetting positions intended to substantially offset currency losses on the hedged instrument. If the hedging position behaves differently than expected, the volatility of the strategy as a whole may increase and even

exceed the volatility of the asset being hedged. There can be no assurance that the Funds hedging strategies will be effective.

The views expressed in this material are the views of Aaron Hurd and Hélène Veltman as of December 2, 2015 and are subject to change based on market and other conditions.

This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.

Source: MSCI. The MSCI data is comprised of a custom index calculated by MSCI for, and as requested by, SSgA. The MSCI data is for internal use only and may not be redistributed or used in connection with creating or offering any securities, financial products or indices. Neither MSCI nor any other third party involved in or related to compiling, computing or creating the MSCI data (the “MSCI Parties’) makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and the MSCI Parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to such data. Without limiting any of the foregoing, in no event shall any of the MSCI Parties have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages.

This communication is directed at professional clients (this includes eligible counterparties as defined by the appropriate EU Regulator. who are deemed both knowledgeable and experienced in matters relating to investments. The products and services to which this communication relates are only available to such persons and persons of any other description (including retail clients) should not rely on this communication.

IQ INSIGHTS - SSGA · 2015-09-30 · Figure 3 attributes performance during the euro bear market,...

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