Funds of­fer ‘cur­rency pro­tec­tion’

The Daily Telegraph - Your Money - - YOUR MONEY - James Con­ning­ton

The FTSE 100 has en­joyed suc­ces­sive days of gains, clocking up re­turns ap­proach­ing 5pc since the start of the year. Much of this is driven by cur­rency move­ments, as ster­ling con­tin­ues to fall. This week the cur­rency hit its low­est level since the “flash crash” in Oc­to­ber last year, when the pound dropped by 6pc overnight.

Min­ing and oil com­pa­nies have also con­trib­uted to the rally, with many get­ting their earn­ings over­seas in cur­ren­cies that are stronger than the pound, and so ben­e­fit­ing from a boost.

While the gains are great news for in­vestors now, the cur­rency ef­fect on re­turns shows how vul­ner­a­ble in­vestors are to ex­change rate moves.

One way to elim­i­nate this risk is to use a “hedged” share class, which many pop­u­lar funds of­fer.

These “hedged” funds use cur­rency ex­change con­tracts to can­cel out the im­pact of ex­change rate move­ments on an in­vest­ment.

If all of the for­eign cur­rency ex­po­sure of a fund is hedged against, the re­turn should only come from the ac­tual move­ment of the stocks held – as if you owned them in their lo­cal cur­rency. This can be ben­e­fi­cial or not, de­pend­ing on what hap­pens to ex­change rates.

For ex­am­ple, the non-hedged share class of Sarasin’s The­matic Global Eq­uity fund re­turned 29pc over the past year, but the hedged share class re­turned only 10pc.

This is be­cause the fund is 60pc in­vested in the US, and the pound weak­ened against the dol­lar.

Con­versely, the non-hedged share class of the UBS Life Ja­pan Eq­uity tracker fund re­turned 33pc be­tween Jan­uary 2012 and Jan­uary 2015, whereas the hedged share class re­turned 93pc.

Over that pe­riod, the pound strength­ened sig­nif­i­cantly against the Ja­panese yen. Re­turns from the reg­u­lar share class were hurt by be­ing con­verted back into a stronger pound.

Here are a few other things to bear in mind. Some hedged share classes aim to off­set 100pc of the for­eign cur­rency ex­po­sure, while some may only hedge part of the ex­po­sure.

There are more trans­ac­tion costs in­volved in run­ning a hedged share class. The man­ager is also likely to charge a higher fee.

Hedged share classes are most com­mon among bond funds. A num­ber of eq­uity funds of­fer them, but don’t as­sume they will.

Prof­itable hedg­ing: in­vestors in Ja­pan saw the yen fall against the pound last year

Newspapers in English

Newspapers from UK

© PressReader. All rights reserved.