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FTSE WPUWealth Preservation UnitDecember 2011
FTSE WPUContents1 Introduction ..............................................................................................
FTSE WPU1 Introduction       The FTSE Wealth Preservation Unit (WPU) is a currency unit comprising a basket of currencies ...
FTSE WPU2. Currency Risk       The paper currency risk to a Global Investor is large and has a negative real return. Curre...
FTSE WPU       WPU Australian Dollar and USD Australian Dollar Rates                                                    WP...
FTSE WPU       WPU Brazilian Real and USD Brazilian Real Rates                                            WPU Brazilian Re...
FTSE WPU       FTSE WPU Component Weightings as of November 2011                                                          ...
FTSE WPU4. Hedging Into WPU       Global investors’ preference for assets in the leading developed market countries is a f...
FTSE WPU       WPU Commodity Component Weights                                                       WPU Commodity Compone...
FTSE WPUAbout FTSE Group       FTSE Group (FTSE) is a world-leader in the provision of global index and analytical solutio...
FTSE WPUDisclaimer       The FTSE WPU Index Series is calculated by FTSE International Limited (“FTSE”) or its agent. All ...
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FTSE WPU Overview

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New currency basket for wealth protection

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Transcript of "FTSE WPU Overview"

  1. 1. FTSE WPUWealth Preservation UnitDecember 2011
  2. 2. FTSE WPUContents1 Introduction .................................................................................................................................................... 32. Currency Risk ................................................................................................................................................. 43. Wealth Preservation Unit .............................................................................................................................. 4 3.1 Developed Currency Component: Diversifying Foreign Currency Exposure ............................................ 4 3.2 Emerging Currency Component: Hedging External Devaluation Risk ...................................................... 5 3.3 Commodity Component – Hedging Internal Devaluation / Inflation Risk................................................ 64. Hedging Into WPU ......................................................................................................................................... 8Disclaimer ......................................................................................................................................................... 10December 2011 Company Confidential 2
  3. 3. FTSE WPU1 Introduction The FTSE Wealth Preservation Unit (WPU) is a currency unit comprising a basket of currencies and commodities. WPU aims to preserve the long-term real wealth or purchasing power of investors. WPU reduces risk of external loss from changes in relative valuation in currencies and internal loss from inflation erosion of purchasing power. In summary WPU is: • A new mechanism to hedge currency and inflation risks at lower cost • A new tool for investors to control investment risks This is achieved by a systematic process of minimizing global currency translation risk and the hedging of inflation risk through exposure to storable commodities. For non-domestic funds, currency risk is likely to be the largest single risk faced by the fund. Global equities have highly undiversified foreign currency risk. Historically investors have accepted currency exposure as the unplanned consequence of international asset allocation decisions. The implicit currency risk of a global equity basket is concentrated in four currencies (USD, Euro, Sterling and Yen) with unsustainable deficits and the incentive to monetize this debt. These currencies are likely to provide a poor long term store of value. WPU is designed to minimize risk for investors and exhibit greater stability than any single currency, thereby stabilizing currency allocations. WPU is not designed to provide an expected return: the role of WPU is to act as a stable global currency unit for global investors. The base date of the FTSE WPU is 31 December 2011. The base value of the FTSE WPU is one, such that as of the base date the WPU:USD rate is one. The FTSE WPU is a spot reference index. WPU Wealth Protection 60% WPU Wealth Protection WPU appreciation 40% against USD 20% World inflation 0% Cumulative Growth -20% USD depreciation -40% against Euro EUR depreciation against Oil USD depreciation against Gold -60% -80% -100% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 USD : EUR USD : Ozs of Gold EUR : Barrels of Oil World Inflation WPU : USDDecember 2011 Company Confidential 3
  4. 4. FTSE WPU2. Currency Risk The paper currency risk to a Global Investor is large and has a negative real return. Currency swings also dominate investment returns. • Developed market investors are increasingly aware of the need to preserve value in global terms or hedge home currency risk • Investors outside of the main currencies are acutely aware of home currency risk, but face undiversified domestic currency risk and un-hedged cash-flow risk if they fully hedge Currency risk will restrict attempts to diversify outside of one’s home market. This is a particular problem in countries where funds are large relative to the domestic asset market. These funds are forced to invest outside their home market and incur the currency risk. WPU can reduce this risk.3. Wealth Preservation Unit WPU consists of three components each of which mitigates a particular source of risk:3.1 Developed Currency Component: Diversifying Foreign Currency Exposure Global wealth and the majority of international transactions, both trade and financial, are concentrated in the capital markets of the US, Europe, Japan and the UK. Consequently wealth tends to be held in the currencies of these countries. To reduce the level of uncompensated risk borne by global investors from developed markets, the developed market currency component weights are determined by a constrained optimization that minimizes the variance of a basket of foreign currencies relative to the USD and ensures a more diversified set of currency holdings. Cumulative USD/WPU and Euro /WPU Return Cumulative USD/WPU and Euro /WPU Return 40% Euro more recent depreciation against 30% 20% 10% USD depreciating against WPU 0% -10% -20% -30% -40% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 USD : WPU Euro : WPUDecember 2011 Company Confidential 4
  5. 5. FTSE WPU WPU Australian Dollar and USD Australian Dollar Rates WPU AUD Rate 2.2 AUD depreciating 2.0 1.8 1.6 1.4 1.2 1.0 AUD appreciating 0.8 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 USD : AUD WPU : AUD3.2 Emerging Currency Component: Hedging External Devaluation Risk Developing economies represent an increasing component of world GDP and are significant producers of goods and services. WPU attempts to maintain the purchasing power of developed market currencies relative to developing market currencies, as the latter’s currencies appreciate in value relative to developed market currencies. WPU assumes a position in each developing market currency that is proportionate to each nation’s contribution to world GDP. Consequently, as developing economies form a larger part of the world economy, WPU will automatically reflect the increasing importance of maintaining the ability to purchase goods and services from the developing world. Developing market currencies are proxied by the BRIC country foreign exchange rates relative to the US dollar, which is itself a proxy for the developed world.December 2011 Company Confidential 5
  6. 6. FTSE WPU WPU Brazilian Real and USD Brazilian Real Rates WPU Brazilian Real and USD Real Rate 4.5 BRL appreciation 4.0 BRL depreciation 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 USD : BRL WPU : BRL3.3 Commodity Component – Hedging Internal Devaluation / Inflation Risk Over time unexpected inflation destroys real wealth. Therefore in order to maintain purchasing power, periods of negative real return should be minimized. The link between commodity prices and inflation may be captured by the energy and precious metal sectors of the commodity markets. Historically, storable commodities have exhibited a positive and statistically significant relationship to changes in the global inflation rate. Thus oil, gold and silver can serve as an effective hedge against a decline in the real value of money. The high historic volatility of silver, particularly on the downside, results in a low WPU weighting to silver. The minimum WPU component weight is 25bp, consequently the weight allocated to silver is zero. Commodity prices also represent the exchange rate between commodities and the value of the US dollar. Historically, commodity prices were set and priced in US dollars, but increasing global demand for commodities means that they are increasingly being set by global supply and demand conditions. The consequence is a negative correlation between the US price of commodities and the external value of the US dollar i.e. if the US dollar falls against foreign currencies, commodity prices rise in US dollar terms. Hence, commodity exposure may also offer global investors an additional hedge against a loss in the relative purchasing power of developed market currencies.December 2011 Company Confidential 6
  7. 7. FTSE WPU FTSE WPU Component Weightings as of November 2011 Commodities Silver, 0.00% Oil, 1.51% Gold, 3.06% Commodity Developed Developed Country Weights Weights 4% 82% EUR, Developing Country 10.04% Weights USD, Developing 14% 23.13% BRL, JPY, 2.55% 17.81% CAD, 5.15% CNY, RUB, CHF, 7.17% 1.80% 6.21% AUD, GBP, 12.57% 6.89% INR, 2.11%December 2011 Company Confidential 7
  8. 8. FTSE WPU4. Hedging Into WPU Global investors’ preference for assets in the leading developed market countries is a function of the size, liquidity and transparency of those markets. For global investors seeking to maintain the global value of their asset holdings, WPU provides a solution. • Hedging into WPU reduces a fund’s currency risk. Home country currency appreciation can lead to material currency losses for a fund that may outweigh the performance impact of all other active decisions a fund makes as part of the investment process. • WPU offers the scope to hedge large currency exposures. For certain currencies, the foreign exchange market lacks sufficient depth for a fund to be able to hedge back to it’s domestic currency. The lack of depth and and the risk of extreme currency movements places limits on international exposure. Foreign currency risk is a dominant source of the home currency bias exhibited by funds in most countries. • WPU provides protection against a decline in the value of a fund’s home currency. Hedging the currency exposure of international investments into WPU rather than the home currency provides a hedge for a portion of the fund’s assets. This is a sensible objective; hedging all exposure into the home currency violates the basic principle of diversification and exposes a find to significant local risk, be it political or economic. Passive hedging into WPU prevents the forced active management of currency by a fund or the forced reaction to currency crisis by undertaking potentially destabilising hedging activties. WPU Component Weights WPU Component Weights 16% 94% 14% 92% 90% 12% 88% 10% 86% 8% 84% 6% 82% 4% 80% 2% 78% 0% 76% 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 Developing Commodity DevelopedDecember 2011 Company Confidential 8
  9. 9. FTSE WPU WPU Commodity Component Weights WPU Commodity Component Weights 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 Oil Gold Silver WPU Developing Component Weights WPU Developing Component Weights 8% 7% 6% 5% 4% 3% 2% 1% 0% 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 BRL RUB INR CNY WPU Developed Component Weights WPU Developed Component Weights 35% 30% 25% 20% 15% 10% 5% 0% 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 EUR JPY GBP AUD CHF CAD USDDecember 2011 Company Confidential 9
  10. 10. FTSE WPUAbout FTSE Group FTSE Group (FTSE) is a world-leader in the provision of global index and analytical solutions. FTSE calculates indices across a wide range of asset classes, on both a standard and custom basis. FTSE indices are used extensively by investors worldwide for investment analysis, performance measurement, asset allocation, portfolio hedging and the creation of a wide range of index derivatives, funds, Exchange Traded Funds (ETFs), and other structured products. FTSE has built an enviable reputation for the reliability and accuracy of our indices and related data services. FTSE has a long tradition of listening and responding to the market so that it is at the forefront of developing new approaches to index design, many of which are now accepted as the market standard. FTSE prides itself in continuing to invest significant resources in researching and developing new index solutions. The foundation for FTSE’s global, regional, country and sector indices is the FTSE global equity universe, which covers over 8,000 securities in 48 different countries and captures 98% of the world’s investable market capitalisation. FTSE’s flagship global benchmark, the FTSE All-World, is used by investors worldwide to structure and benchmark their international equity portfolios. Exchanges around the world have chosen FTSE to calculate their domestic indices. These include ATHEX, Bolsas y Mercados Españoles, Borsa Italiana, Bursa Malaysia, Casablanca SE, Cyprus Stock Exchange, IDX, JSE, LSE, NASDAQ Dubai, NYSE Euronext, PSE, SGX, Stock Exchange of Thailand and TWSE. In addition, FTSE works with a variety of companies and associations to deliver innovative index solutions which provide the market with fresh opportunities. For more information visit www.ftse.comAbout Mountain Pacific Group (MPG) MPG is an investment management firm committed to the research and development of programs in partnership with senior decision makers from large funds around the world. MPG is responsible for providing FTSE with its expertise in investment management for currency, commodities and financial risk management. For more information visit www.mountainpacificgroup.comDecember 2011 Company Confidential 10
  11. 11. FTSE WPUDisclaimer The FTSE WPU Index Series is calculated by FTSE International Limited (“FTSE”) or its agent. All rights in the FTSE WPU Index Series vest in FTSE. “FTSE®” is trade mark of the London Stock Exchange Plc and The Financial Times Limited and is used by FTSE under licence. “WPU®” and “Wealth Preservation Unit®” are registered trade marks of Mountain Pacific (“Mountain Pacific”). Neither FTSE nor their licensors nor Mountain Pacific shall be liable (including in negligence) for any loss arising out of use of the FTSE WPU Index Series by any person. All information is provided for information purposes only. Every effort is made to ensure that all information given in this publication is accurate, but no responsibility or liability can be accepted by FTSE, Mountain Pacific or their licensors for any errors or for any loss from use of this publication. Neither FTSE, Mountain Pacific nor any of their licensors makes any claim, prediction, warranty or representation whatsoever, expressly or impliedly, either as to the results to be obtained from the use of the name of the Index set out above or the fitness or suitability of the Index for any particular purpose to which it might be put. No part of this information may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission of FTSE. Distribution of FTSE index values and the use of FTSE indices to create financial products requires a licence with FTSE and/or its licensors.www.ftse.com/analytics Beijing +86 (10) 8587 7722 New York + 1 888 FTSE (3873) Dubai +971 4 319 9901 Paris +33 (0)1 53 76 82 89 Hong Kong +852 2164 3333 San Francisco +1 888 747 FTSE (3873) London +44 (0) 20 7866 1810 Sydney +61 (2) 9293 2864 Milan +39 02 3604 6953 Tokyo +81 (3) 3581 2811 Mumbai +91 22 6649 4180December 2011 Company Confidential 11

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