How dollar weakness delivered unexpected alpha for internationally exposed institutional portfolios
The greenback’s first-half stumble may have dampened domestic asset valuations, but for sophisticated institutional investors like the $19.7 billion San Diego County Employees’ Retirement Association, currency volatility became a powerful performance catalyst. SDCERA’s diversified approach transformed what many viewed as dollar weakness into substantial outperformance across multiple time horizons.
Speaking to the pension fund’s board, Deputy Chief Investment Officer Tom Williams delivered results that underscore the value of global diversification in an era of shifting monetary dynamics. The Euro Stoxx 50—Europe’s equivalent to the Dow Jones Industrial Average—posted impressive 9% gains year-to-date, but currency translation effects magnified returns for dollar-based investors to nearly 24%. This foreign exchange tailwind helped SDCERA’s global equity portfolio exceed its benchmarks across one-, three-, and five-year periods, with returns of 16.3%, 18.2%, and 14.6% respectively outpacing their corresponding targets.
“The appreciation of the Euro versus the dollar transformed already solid European performance into exceptional returns for US investors,” Williams noted, highlighting how currency movements can either amplify or diminish underlying asset performance depending on positioning and timing.
The dollar’s recent travails reflect deeper structural concerns about America’s fiscal trajectory. Trade policy uncertainty and expanding budget deficits have pressured the currency, with one major credit rating agency recently downgrading U.S. sovereign debt from its pristine AAA rating to AA+—a symbolic but significant erosion of America’s financial standing. This fiscal deterioration has coincided with a flight to traditional safe havens, most notably gold, which has surged more than 40% as both institutional and sovereign investors seek alternatives to dollar-denominated assets.
Yet Williams struck a measured tone regarding dollar doom scenarios. Despite recent weakness, the greenback retains its dominant global position, underpinned by America’s status as the world’s largest economy and home to its deepest, most liquid capital markets. The technology sector’s continued concentration in U.S. markets—illustrated through Williams’ presentation of major tech companies’ market capitalizations—reinforces America’s equity market advantages over European counterparts.
This nuanced view reflects SDCERA’s broader investment philosophy: tactical positioning within a strategically diversified framework. “Equity returns dominate the returns of public pension funds, including our trust fund,” Williams emphasized, reinforcing the institution’s commitment to risk assets while acknowledging the importance of geographic and currency diversification.
The fund’s current allocation reflects this balanced approach: 49.9% in public equity markets, 31.4% in fixed income and cash, 13.9% in private assets, and 4.8% in opportunistic investments as of June 30. While the portfolio’s one-year return of 11.2% fell short of its 12.3% policy benchmark, the longer-term outperformance across multiple time horizons suggests SDCERA’s diversification strategy is achieving its intended risk-adjusted returns.
For institutional investors navigating an increasingly multipolar financial landscape, SDCERA’s experience offers a compelling case study in turning macroeconomic headwinds into portfolio tailwinds through thoughtful asset allocation and geographic diversification.
