Foreign Currency Risk

How to deal with foreign currency risk (part two)

0:11welcome to this explains finds video this week part to my how to deal with
0:17 foreign currency risk series this time turning my attention to funds call you
0:22game that is my not invest directly in overseas assets they might pick funds
0:28that do that for them
0:29should you pick up on this hedged or should you just pick up plain old aged
0:35let’s have a look so the problem is I am in a problem lots of people want to
0:41invest overseas they’re quite happy to leave that will fund manager but they
0:44are gonna take on potentially foreign currency risk in other words even though
0:48someone else is doing investing for you they on your behalf are running late
0:52investment risk that’s the idea that what they go what they thought I might
0:57go down as well as up and foreign currency rates exchange rates move while
1:02you’re invested so why would that matter imagine UK fund managers got some us’
1:06investments alright so thousand pounds a small example is invested in the
1:12exchange rate one-pound to $1 50 and buys the fund manager $1500 worth USD
1:18investments so far so wat well hopefully the fund manager knows what they’re
1:23doing so that investment was $1,500 becomes $2,000 great $500 profit and
1:30when that’s translated back into sterling later at the same exchange rate
1:36there’s an assumption of just made it turns into 1333

foreign currency risk
1:40will break you got it right that was started off the thousand pounds now got
1:44333 pounds of a $500 profit what’s to worry about the point is you probably
1:51spotted it not he’s not a realistic assumption that the exchange rate just
1:56hasn’t moved the cause if the exchange rate work to move so there is no longer
2:01$101 $50 to a pound it was the dollar’s weekend the pound strengthened as they
2:10say then the $2000 turns into a thousand pounds sterling he suddenly that’s no
2:16problem at all so that’s a potential problem in exchange rate moves against
2:21you now of course you could say he could go
2:24in your favor yes it could be you don’t know I mean it could be the case the
2:28$2000 the original 1500 + the five hundred dollar gained in local currency
2:33comes back over to the UK when the race 1 2010 the word the dollar strengthened
2:38and the pounds weekend fewer dollars and that means $2,000 becomes 2,000 pounds
2:45and a stick sterling profit on the original thousand 1,000 pounds eww money
2:50but the fans taking quite a riskier because these outcomes of pretty far
2:54apart everything from making nothing on the original money that you’ve got with
2:58a fund to make it a little bit irreverent three pounds to doubling your
3:01money was a pretty big difference was investigating I want to know what the
3:05funds up to the reality is fund managers can choose not to tell you in the
3:11marketing literature to hedge or not hedge foreign currencies it does make a
3:16difference now how do they decide to the bottom line is if they want to head down
3:21to forty foreign exchange rate risk averse remove it they’ll pay for that
3:25they used contracts called derivatives and let me go into details here but they
3:29pay a price to do that so they’re always thinking is it were paying that price or
3:33not this investor you’ve gotta think about that too do you want a farm
3:37hedging foreign exchange risk on your behalf or not you will pay a price if
3:43they choose to run hedged positions BMI benefit so how do you make up your mind
3:49which one to buy
3:50well give you a few pointers some rows of them with bond funds it often makes
3:54little sense not always found that is doing foreign currency hedging because
4:00bond funds are kinda steady as you go type funds right not spectacular growth
4:05and foreign currency can wipe out any gains they make you know given period
4:11with equity funds I gotta be honest the case is more debate we want to take some
4:16advice on this because it does depend on equity found your home for legal again
4:20found that can be any foreign car
4:22movements in performance terms I really given period so therefore it’s more
4:26marked in case you wanna pay the extra cost of the hedge give me a couple of
4:30illustrations take a couple of currencies the USDollar safe-haven
4:34currency currency that people tend to run to in times of trouble so you know
4:38you get quite a bit of dollar strengthened if you are you came Vesta
4:41investing in funds got USDollar asset maybe you want to benefit from that
4:46dollar strengthened if the fund is hedging the dollar you won’t get that
4:49benefit I’m not saying therefore never buy a hedged USDollar fun you gotta
4:55think about it
4:55Japanese yen we’ve seen over the last five years tends to strengthen not
5:00always obviously but tends to strengthen and Japanese equities week or vice versa
5:04so if you buy a hedged noticed my hedge fund basically you could be doubling up
5:11your downside and that’s a bit of a problem is another example of a currency
5:15way you don’t just wanna jump in as a foreign exchange stuff that might not
5:20work in your favor and is another example of what you might think funds
5:23would hedge foreign exchange rate risk but actually opened own emerging-market
5:27incredibly volatile markets go all over the place the currency can go all over
5:30the place shortly
5:32fund managers would normally hedge investment in emerging market actually
5:36they often don’t you need to know that an investor and the reason without going
5:40to tango is something called Kerry costs in order in order in order to set up
5:44that hedge between let’s say sterling and the Brazilian right now if interest
5:50rates here one percent and they’re a 10% mechanism differential you will see
5:55between developed and emerging market funds gonna bear a carry costs as it’s
6:00called of the difference in 1991 saying they’re saying is the cost of running a
6:06hedge position is sizable to the farm manager might decide not to bother even
6:11though the fund invested in a very volatile market and that’s going to mean
6:15as an investor the Fund may not be age so make sure you read the small print by
6:21editing and it will be pretty volatile guarantee someone is taking the decision
6:26not to hedge currency on the basis of the costs involved in doing so
6:32and then one final thing people sometimes think crikey want to change my
6:36mind you know I didn’t buy a fun that was hedge now what I wish I had known to
6:40be in a hedge fund or or got one is heading for encouraging I wish they
6:43didn’t is it worth switching all depends where you got one thousand with two
6:49different share classes you can do it cheaply and fairly quickly and you don’t
6:52incur capital gains tax bill normally on doing so
6:56alright funds got class of Shadows hedged another class that isn’t should
7:02be a straightforward switch your problems getting our way of looking at
7:06switching between either two different types of fund at the same fund house or
7:10even two completely different bond houses right there a the cost of doing
7:15this which will probably be more anyway they might trigger a capital gains tax
7:19disposal on the one you can get closing down and selling so I gotta think about
7:23it the game worth taking a bit of advice not just a jumping in the thirties
7:29considerations and a UK investment funds that invest overseas quite a bit of
7:35ground covered questions the usual place please