The so-called "wealth preservation unit", or WPU, is essentially a basket of eleven currencies and two commodities – gold and oil – which is seen as enabling investors to hedge their currency exposures.
Ronald Liesching, chairman of Mountain Pacific Group, a US-based currency firm which was involved in helping FTSE Group with the creation of the new WPU, said in a statement accompanying the unveiling of the new currency unit that currency risk is "likely to be the single largest risk confronted by today’s global institutional investors".
In the same statement, the FTSE Group, which is best known for its stock index business, and which is owned by the London Stock Exchange Group, said the WPU had been conceived in response to the investment challenge presented by currency swings over time, coupled with the problems paper currencies face as purchasing power becomes eroded by inflation.
"In response to this investment challenge, and in consultation with Mountain Pacific, FTSE WPU provides investors with a transparent and reliable tool which aims to mitigate both risk of loss arising from changes in relative valuation in currencies, as well as internal loss from inflation erosion of purchasing power, in order to preserve wealth over the long-term," the FTSE Group said.
‘Developed, emerging currencies, storable commodities’
The WPU is constructed from a combination of developed currencies, emerging market currencies and what are described by FTSE as "storable commodities".
The world’s seven largest currencies are included among the eleven, with the US accounting for the biggest weighting in the currency basket; the other six of these are the euro, British pound, Australian dollar, Japanese yen, Swiss franc, and the Canadian dollar. The other four so-called "emerging" currencies are those of Brazil, Russia, India and China.
"Each component within this multi-asset solution mitigates a particular source of risk; diversification of foreign currency exposure across developed currencies, hedging power risk against BRIC currencies, and hedging inflation risk through exposure to commodities.
"FTSE WPU is designed to maximise risk for investors, and exhibit greater stability than any single currency."
Whether the WPU will catch on among investors will, experts say, be interesting to watch. Until now, investors have shown little interest in currency baskets, preferring to, effectively, create their own as needed.
Perhaps the best known is the SDR, or special drawing rights, which was conceived in 1969 by the International Monetary Fund, but historically has found few takers outside of governments. Another is the USDX, or dollar index, which is a basket of currencies that does not include the US dollar (euro, Japanese yen, Canadian dollar, British pound, Swedish krona and Swiss franc).
To view a fact sheet on the new FTSE WPU, click here.