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Currency fluctuations and investing

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Q. I have some money invested in international shares. How does the fluctuations in the $A affect my return?

Josie’s Answer - Once a decision has been made to invest in a security of another country, it automatically involves an investment in that currency.

An investment in an American share will mean that the return will be affected by any movement in the US Dollar relative to the Australian dollar. If the US Dollar strengthens, then the value of an investment in a US share will also strengthen.

So depreciation of the Australian dollar adds value to an overseas investment, and an appreciation of the A$ means that it will detract from returns. If you are invested in a managed fund (and you probably are through your super), some fund managers have the option to employ hedging strategies or active management of currency.

Hedging is a tool employed as insurance, to protect a portfolio from future exchange rate variations. If you fund states it is ‘unhedged’ it means that it will benefit from a depreciating $A, but the return will reduce by an appreciating $A.

An unhedged strategy effectively means that the fund manager will ‘do nothing’ and leave the currency in the denomination of the physical security that was purchased.

On the other hand, a hedged portfolio generally reflects either a belief that the Australian dollar will appreciate, or that the investor wishes to limit the volatility of the portfolio.

By reducing the exposure to currency through hedging, the overall volatility of the investment should be reduced. Just in case you are interested, the tools used to hedge an investment include the purchase of forward foreign exchange contracts or futures contracts, whereby the investor agrees to buy Australian dollars and sell the currency in which the security is denominated at a fixed rate at a specified time in the future (you don’t really need to worry about this detail).

Basically it means that your portfolio will not be affected by the $A going up and down. Again diversification is that magic words I use often. I also have my money invested internationally and use Fund Managers that utilize hedged and unhedged strategies to manage the fluctuations in the currency.

Here are some more articles about International Shares from around the Web:

International Share Trading using CFDs
What sort of returns can I expect from different types of investments?
What Asset Allocation Can Do For You?
10 Tips for Those start In the Stock Market

Don’t forget that the above information is general in nature and not specific to your goals and objectives. It is recommended that you seek personal financial advice specific to your needs.

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