A global approach to asset allocation requires investors to buy assets denominated in currencies other than their home or reference currency. Why would an investor or an investment manager do this?

There are four main drivers behind global asset allocation.

1. Safety of capital

Investing in assets denominated in a 'foreign currency' can offer protection against sovereign and country risk factors where the investor's reference currency exposes their wealth to socio-political threats or the capital eroding effects of inflation and/or currency depreciation.

2. Size and sophistication of capital markets

Deep, liquid financial markets with a wide choice of investment products are only available in a few major currencies.

3. Value

In the search for high investment returns – for undervalued assets with exceptional growth opportunities - some countries will have better economic prospects than others.

The danger here is that fluctuations in rates between a reference and an investment currency can wipe out any returns which may have accrued in local market terms, turning a winning local investment into a losing global play.

4. Diversification benefits

Low correlation between the economic fortunes of different countries offer enhanced investment risk reduction benefits.

Let's look at each of these drivers in turn.