Pound & Euro Saver

Barclays Global Investors have recently launched two new ETFS:

iShares € covered bonds (ICOV.L & SCOV.L)

This fund replicates an index tracking the performance of € denominated covered bonds. Covered bonds are debt securities issued by corporates entities and are secured by a pool of assets. They are very similar to asset back securities created in a securitization process but there is a major difference: the bonds and the assets that back them are still on the balance sheet of the issuer (banks) and therefore:

• Assets have to be replaced if they are defaulting or prematurely reimbursed
• You have recourse on the bank and on the assets.

Covered bond where the preferred solution in Europe whereas seuritization was more popular in the US.

• On the investor point of you they offer more recourse than securitized assets
• On the bank point of you the mortgage are still on the balance sheet whereas it would prefer to have them off.

The good:

• The recourse on the pool of assets and on the issuer are likely to mean a AAA rating for these bonds (92% where AAA-rated at the time the fund factsheet was written)
• Those kind of securities are likely to yield slightly more than government bonds even if they have a similar rating.

The bad:

• They are riskier than AAA-rated government debt securities.
• 30% of the portfolio is made of Spanish covered bonds. My guess is that a significant part of it are mortgage based and we must seriously question and today there are serious questions about the strength of the Spanish housing market and the Spanish banks.

iShares Global Inflation Linked Bonds (IGIL.L)

This fund is replicating the performance of an index of Inflation Linked Bonds issued by various government (AAA-rated government are accounting for 83% of the bonds in the index). Those bonds are mainly libelled in all the major currencies (USD, GBP, EUR) as the US, the UK and France are the biggest issuers of inflation linked bonds. You will nevertheless have exposure to some more exotic currencies like the Australian dollar (AUD), the Canadian dollars (CAD).

The good:

• The coupon paid by those bonds depends on the level of inflation observed in the country. It helps to mitigate one of the risk when investing in bonds: your investment may lose value when it yields less than current interest rates and the current rates generally depends on inflation.

The bad:

• You are blending in one index and therefore one product several investments in different currencies. You will therefore be exposed to a currency risk while investing in this kind of product.

More

• iShares web site
• Covered bonds

If like me you are not English and as of now (things may change after all), you don't think you gonna spend your whole life in the UK, it is always really painful to watch the GPB crashing versus the Euro. You may not be in a hurry and think that the GBP will ultimately strengthen versus the EUR again but if you have obligations to meet in EUR in the short term you may want to do something.

Convert your money in Euro right now

If you have the GBP right now and if you are really convinced that the GBP will continue to fall this is the solution for you. Your bank may do it for you but you may find better rate by going through specialist brokers. If you are using an offshore bank, they may also hold your money in EUR and provide you saving accounts.

Lock today's exchange rate with a forward

If you don't have the money right now (a payable bonus by example), you may want to lock the current exchange rate for converting your bonus. Your bank of specialized brokers can also do this. It is roughly the equivalent of the 3 following operations:

1. borrowing the amount to be converted in GBP
2. exchanging it to EUR right now.
3. investing the converted amount in EUR

When you deliver the GBP, the bank will deliver the EUR.

By using this solution the exchange rate is fixed today and you will be better off if the GBPEUR get weaker and worst off if it goes in the other way.

An alternative could be to short the GBPEUR through one of these spread betting companies

Benefit for a strengthening Pound while protecting yourself from a potential weakness

The last option you have is to buy derivatives products. AVOID THIS ONE UNLESS YOU REALLY UNDERSTAND WHAT OPTIONS ARE.

Roughly by acquiring a put option on the GBPEUR currency pair, you can edge yourself against a potential weakness of the pound without loosing too much if the GBPEUR get stronger. These options can also be acquired through a spread betting company.

Be really careful as you need to clearly define how much options you need to buy in order to hedge your position without taking to much risks. Moreover an option portfolio should be monitored like heating milk and adjusted regularly.