Source: Investing.com from 13.12.18 to 13.12.23.
Even so, such contrary moves between a stock market and its currency as we have seen recently still begs the question as to whether investors ought to consider a strategy that hedges out currency risk.
Generally speaking, actively managed investment funds are unhedged against currency movements. This is sensible, given that currency moves are hard to predict and hedging entails an ongoing cost to investors with no guarantee of adding value.
It’s important to remember too that the performances of the underlying companies that a fund holds are also affected by currency movements.
Exporters benefit from a weak home currency that makes their products and services more internationally competitive. On the other hand, businesses importing goods from overseas to sell to their customers at home see an uplift from a strong home currency. Hedging out all of these upside and downside risks would not be a realistic prospect.
These considerations are worth bearing in mind in the context of investing in the UK. Avoiding overseas markets certainly doesn’t mean avoiding currency risk. At the last count, 82% of the revenues of FTSE 100 companies were earned in foreign currencies. Even more surprising, perhaps, is that around 57% of the earnings of FTSE 250 businesses also come from abroad4.
One of the consequences of this is that UK investors have the opportunity to allocate some of their money overseas, with only a limited increase in effective currency risk compared to investing in the UK alone.
Some sterling bond funds that invest globally do hedge. They see hedging currency risks as removing one impediment to maintaining a stable income for their investors. Hedging can also add to a bond fund’s stabilising capability when held in a diversified asset portfolio.
A perennial best seller at Fidelity Personal Investing – the Fidelity Index World Fund – tracks the MSCI World Index converted back into sterling. It has an ongoing charge of just 0.12%, so offers an attractive way of diversifying an investment portfolio composed mainly of UK funds or shares without taking on additional (direct) currency risk.
However, these examples are much closer to being the exception than the rule. For most investors the sensible approach is to manage rather than defeat currency risk. By holding a portfolio of investments diversified by geography, the effects of a significant move of an individual currency is soon watered down. Time often performs a similar task.
Source:
1,2,3 Bloomberg, 12.12.23
4 FTSE Russell, 18.10.22
