03/10/2016 Neutral Real Interest Rates

In this piece, the Record team explore the phenomenon of the Natural or Neutral Real Interest Rate which can be thought of as the rate at which demand and supply are balanced and as the real return on capital.

For the rest of this article, click here.

30/10/2015 UK productivity

Since the global financial crisis, the UK has suffered from "poor productivity". In this piece, Neil Record explores the details of this fall, what it means for the economy and which sectors are driving it.

To read the full paper, click here.

29/06/2015 Developments in Greece and the Eurozone

With talks aimed at negotiating the terms of a €15 billion loan enabling Greece to repay the IMF breaking down, the Greek prime minister, Alexis Tsipras, has announced a referendum on the acceptance of the latest bailout terms.

For the full update, please click here.

13/01/2015 The Role of Currencies in Institutional Portfolios

Javier Corominas and Jonathan Scott recently contributed a chapter to a new book by Pojarliev and Levich on 'The Role of Currency in Institutional Portfolios'. The chapter discusses the economic rationale behind emerging market currency returns and the rewarded risk that investors can access by investing in them. 

For more on this book, please click here


31/10/2014 UK Economy Mix

The current trend amongst policitians in the UK is to bemoan the decline in the manufacturing sector. The aim of this note is to examine the potential of the services sector to drive UK growth in the future and to address some misunderstandings about the workings of modern economies.

To read the full paper, please click here.

01/01/2014 Why the financial world is now almost impossible to understand

Neil focuses on the disconnect between the financial world and the general public, which is caused by problems of language and inadequate common discourse.  Financial jargon has led to a series of catastrophes (Neil highlights the recent example of a Danish 'Dairy', who were missold a contract they scarcely understood, and lost their entire deposit as a result) - and this confusion extends to national governments. The key to avoiding future disasters is to ensure that all financial language involved in transactions (especially jargon and mathematics), are fully understood.

You can read Neil's article here.

01/10/2013 The Hidden Risk Factor

To achieve maximum returns consistent with an investor's appetite for risk, the correct identification and estimation of all relevant risk factors in a portfolio  are necessary. This paper identifies the role of foreign currency as an important risk factor from an international investor's point of view.

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05/07/2012 Neil Record - Revised Essay - Wolfson Economics Prize 2012

Neil Record - Revised Essay - Wolfson Economics Prize 2012

After the initial short-listing process, the five finalists for the Wolfson Economics Prize were asked to re-write their essays before the final round of judging. In this revised version, Neil focuses on designing a route out of the Euro for one or more countries which would minimize economic, financial and political damage, whilst allowing growth and prosperity to replace crisis and austerity. He continues to defend the position that as soon as one country leaves the Euro, the view that the project is 'unbreakable' would be indefensible, whilst analyzing the consequences of piecemeal exits and the continuation of the slow-motion crisis, with particular attention given to the Eurozone banking system.

Neil's full revised submission is available here.

18/06/2012 Discussion: Implications for the Euro of the Greek Election

Discussion: Implications for the Euro of the Greek Election

The June 17th election in Greece will represent a new milestone in the two year-old Eurozone crisis. Record Currency Management Chief Investment Officer Bob Noyen discusses the first implications of the election results. This discussion was produced for an investment audience and focuses on impacts on US investors' asset portfolios. In particular, Bob focuses on the impacts on the Euro both in the short- to medium-term and how the Greek result could impact asset allocation and risk factors consultants face with their clients. Euro equity assets represent approximately 20% of most major indexes and the Euro is the largest single currency exposure for most US institutional investors.

For a full recording of the discussion, click here.

04/04/2012 Neil Record - Wolfson Economics Prize 2012

Neil Record - Wolfson Economics Prize 2012

In 2011, as the eurozone lurched from summit to summit, caught in the throes of the sovereign debt crisis, Lord Wolfson offered £250,000 to the architect of the most elegant mechanism for the unwinding of the eurozone. From the 425 entries received for the Wolfson Economics Prize, a short-list of five finalists was chosen, and announced Tuesday 3rd April 2012. Neil Record's submission was one of the five short-listed entries. In the full paper, which can be downloaded below, Neil outlines in some detail the steps required in a number of areas if a transition from the currency union were to be necessitated. It is Neil's firm view that if both the turmoil of patchwork solutions and the catatstrophe of unplanned default are to be avoided, the currency union must be dissolved immediately and fully as soon as one member state's exit becomes inevitable. Moreover, the transition is to be planned by a secret, completely deniable task force led by Germany, whose threat of walk-out and centrality as a player in the crisis would hold the other nations together.

You can download Neil's full and fascinating entry directly here.

03/04/2012 James Mackenzie Smith - Wolfson Economics Prize 2012

James Mackenzie Smith - Wolfson Economics Prize 2012

In 2011 Lord Wolfson offered a prize of £250,000 for the most elegant and imaginative suggestion for unwinding the euro zone. The second largest prize after the Nobel in monetary terms, the prize caused a clamour in eurosceptic circles and received 425 entries. Record Senior Research Strategist James Mackenzie Smith submitted an entry for the prize, titled 'Plan B', which outlines the legal, political and economic challenges in dismantling the currency union. Whilst Neil Record, in his submission, argues that the breakup would have to be planned in secret, James disagrees and has written a paper which diverges from Neils in several respects. Although not on the short-list for the Wolfson Economics Prize, James' entry is a high-quality piece of economic argument and makes an interesting counter-point to Neil's piece.

James' entry can be downloaded directly here.

01/01/2012 What Next for the Eurozone?

What Next for the Eurozone?

The recent dislocation in currency and credit markets over the travails of the Eurozone has put concerns regarding fiscal sustainability, current account imbalances, and the economic recovery back to the forefront of investors' radar screens. At Record we believe that these as yet unresolved issues are critical and merit further attention and scrutiny. Indeed, what had been termed theunthinkable is now thinkableand distinctly possible.

We believe that the most recent sovereign debt downgrades and the continued volatility in peripheral bond yields are probably not the end of the story. It may have assuaged markets temporarily, but this means that the worst case scenarios are thusnot fully reflected in current asset price valuations. In particular, we feel that there are particular outcomes that have not yet been properly considered and that could drastically affect the evolution of risk appetite, volatility, and asset class returns. Furthermore, the impact of any of these outcomes could come in the form of a sudden, unpredictable event, or 'black swan'. The scenarios all point towards future paths that the Eurozone may embark upon, either willingly or unwillingly, and which require consideration for any investor.

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01/01/2012 Event Risk and Black Swans

Event Risk and Black Swans - what is in store for 2012?

This note outlines what Record's research strategists perceive as the major themes and critical tail risks to be monitored in 2012. While we do not expect all of these risks to materialise over the course of the year, we believe investors should pay heed to the portfolio and liquidity risks that would be created by the scenarios below.

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01/01/2012 The Case for Emerging Market Currency Investment

The Case for Emerging Market Currency Investment

As emerging market (EM) countries become richer their currencies become stronger and in so doing their currencies converge with those of developed countries. One of the most compelling arguments for this is based on the convergence of EM per capita income towards that of industrialised (OECD) countries. This is probably best explained by the work of the economists Balassa and Samuelson.

According to the Balassa-Samuelson (B-S) effect the real exchange rate (i.e. how many real goods does a particular currency unit actually buy) is broadly a function of relative productivity growth over the longer term. Countries that exhibit high productivity growth are likely to have a tendency to see rising domestic prices and thus an appreciating real exchange rate.

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01/12/2011 The Potential for Capital Controls in Switzerland

The Potential for Capital Controls in Switzerland

Switzerland's Finance Minister has said that Switzerland is examining capital controls and/or negative interest rates as a way of controlling capital inflows.  This note looks at the possible options.

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21/11/2011 Assessing Sources of Excess Return in Currencies

Assessing Sources of Excess Return in Currencies

This summary paper represents Record's view of the opportunities to generate excess returns in currencies (November 2011). Currency exposure is often viewed as a source of extra volatility which is unrewarded in the sense that it generates no excess return over time.

In this paper we counter this view, arguing that the FX market resembles other markets in that it contains opportunities which persistently deliver excess returns. The existence of return opportunities in the currency market (which is, by its nature, a zero sum game) is justified by two facts: firstly, a large proportion of market participants are not profit seekers; and secondly, countries in external balance of payments deficit have to make their currencies' prospective return sufficiently good to attract currency investors.

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20/11/2011 The Euro - Consequences of a Break-up

The Euro - Consequences of a Break-up

A few short years ago, countenancing the break up of the Euro was the preserve of sceptics, heretics and the lunatic fringe, a position that has changed dramatically with the unfolding of the Euro crisis. Not only is there now a willingness to contemplate the possibility, but it has moved into the mainstream of political, economic and financial debate. The concerns Record has articulated since October 1998, before the Euro came into being, are now playing out and this paper is a guide to considering outcomes from an institutional perspective. Specifically this paper considers institutional pension funds which make up the core of Record's client base. These entities have entered into hedging assignments strategically to match their assets, i.e. international investments, to their future liability stream which tends to be in a single currency typically where the pension fund is domiciled.

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01/11/2011 International Portfolios - Protecting Currency Gains

International Investment Portfolios - Protecting Currency Gains

This paper illustrates the Dollar weakness in a historical and "fair value" context and the extent to which it has enhanced foreign asset returns.  It then outlines how a reversal would affect these returns, and how hedging can mitigate this.

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01/08/2011 The Currency Forward Rate Bias as an Asset Class

The Currency Forward Rate Bias as an Asset Class

Currency markets in the aggregate are necessarily 'zero sum' markets - i.e. an appreciation in the value of one currency can only be expressed by reference to another currency, which necessarily experiences a corresponding depreciation.  There is therefore no aggregate 'return' from simply holding currencies, by contrast to equities, for example.

Notwithstanding this aggregate performance, there are empirically-observable and persistent price patterns that prevail in currency markets.  The purpose of this paper is to evaluate the proposal that one of these price patterns, the 'forward rate bias' (FRB), represents a rational 'risk premium', i.e. payment of a reward for risk assumed in connection with an economic function.

The significance of the identification of the FRB, or indeed any other price pattern, as a risk premium is that it provides justification for long-term strategic investors, who seek to allocate capital to rewarded risks, to regard that premium as an asset class, and hence potentially worthy of long-term strategic capital allocation, provided certain criteria are met.  This paper also considers what those additional criteria might be, and evaluates whether the FRB meets them.

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01/06/2011 FX Transaction Costs - Plugging the Leakage in Returns

FX Transaction Costs - Plugging the Leakage in Returns

Custodian banks provide a service to their clients - to safeguard their assets - and undertake ancillary transactions as required.  Some of these transactions require an accompanying FX trade: this necessity has proved to be a hidden source of revenue for custodians for at least a decade.  Plan Sponsors do not necessarily see custodians as requiring to be monitored on a regular basis, nor do they typically consider the possibility of transferring FX execution responsibility to an independent agent; this paper argues that they should.

This document offers several suggestions including the publication of time-stamps for each trade; a regular audit of FX execution; and execution of FX by an independent agent. In short: greater pricing transparency and/or elimination of conflicts of interest is required.

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07/05/2011 The Euro - Greece in Context

The Euro - Greece in Context

The Eurozone is facing a serious crisis. This is not the first challenge it has faced - there have been several in the Euro's 11-year life, most notably the March 2005 softening of the Growth and Stability pact to (in effect) sanction prior-year breaches of the 3% deficit rule by France and Germany.  But none has yet gone to the heart of the Eurozone's constitution.

In the following pages, Neil Record revisits a paper he wrote in October 1998 (published in early 1999), just before the Euro came into being.  He has annotated in the right hand margin his observations on the scenarios in the paper, updated for the conditions of the current crisis.

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01/01/2011 The Rationale for Currency Hedging

The Rationale for Currency Hedging

This note sets out some of the reasons why a UK institutional investor might wish to hedge the currency exposure inherent in the international components of its investment portfolio.

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01/11/2009 The Balassa-Samuelson Effect Explained

The Balassa-Samuelson Effect Explained

The most compelling argument for investing in emerging markets relies on per capita income convergence towards that of industrialised countries. This, the Balassa-Samuelson effect, is examined in this paper.

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01/07/2009 Cash Flow Management in Currency Hedging Mandates

Cash Flow Management in Currency Gedging Mandates

This note considers various approaches to managing cash flows, and in particular negative cash flows or cash outflows, for institutional investors undertaking currency hedging of international assets through forward contracts.

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01/06/2009 Disentangling Returns from Hedged International Equities

Disentangling Returns from Hedged International Equities

The purpose of this note is to describe the various sources of return that accrue to a USD-based investor in international equities, including any hedging returns.  We also comment on the importance of being able to distinguish between these returns in reporting systems.

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