Funds and currency exchange rates

JasonPr

I have a very basic question about funds and exchange rates. I guess part of my problem is a lack of understanding and another part psychology...

We all know that the pound is much weaker than it was a few years ago (although it has strengthened slightly recently). We can all argue (and disagree) about what the pound should be worth, but in my mind one pound is around 1.45 Euro and not the 1.21 it currently is.

Because of that, I've mostly purchased UK FTSE based funds recently because I don't want to buy overseas funds when the pound is weak. Let's say I buy a German fund and the German market goes up by 10% but the pound also goes up by 10% then I wouldn't gain anything (correct?).

On the other hand, many large UK companies have a lot of overseas revenues, so if the pound goes up, their revenues would probably go down, and hence the UK FTSE.

So does my strategy of buying only UK funds (funds that invest in UK companies, not just UK domiciled funds) really make sense?

I'm reaching a point where too many of my assets are in UK funds and I'm wondering whether LifeStrategy 100% Equity wouldn't be a better solution. At the some time, it feels wrong to invest abroad when the pound is so weak. Am I irrational?

Any comments appreciated!

bigadaj

I sort of see what you're saying but I think your probably focussing too much on exchange rates. It is something I consider though it probably affects my holiday location as much or more than my investment strategy.

Diversification is probably more important than exchange rate concerns, particulalry as the earnings of the largest uk companies are predominantly overseas and so buying shares in pounds doesn't really affect things as their earnings are in dollars, euros, yen, etc

It doesn't make sense to have a fixed exchange rate in mind but it's surprising how often these things return to a mean. I'd agree that the euro is strong relative to sterling but my target price would be lower than yours at around 1.33. Conversely the pound is at or above fair value relative to the dollar and as I'm underweight in the us I have a. Temptation to invest more there only tempered by the strength of the us market currently and the fact that assessing neutrally and rebalancing would suggest selling us shares.

gadgetmind

Exchange rates and interest rates are critical when looking at fixed interest and cash investments, but for equities I don't care too much.

When you're buying a real underlying investment, that being a part share in a company via ordinary shares, I think the price in whatever currency reflects the value of that underlying investment versus the value of that currency. So, if the Euro drops, the price of German companies in Euros will increase to reflect this.

However, their Euro bonds (fixed interest) will lose real value as they deliver coupons in Euro and will be redeemed in Euro.

Linton

JasonPr wrote: »

.....

Because of that, I've mostly purchased UK FTSE based funds recently because I don't want to buy overseas funds when the pound is weak. Let's say I buy a German fund and the German market goes up by 10% but the pound also goes up by 10% then I wouldn't gain anything (correct?).

On the other hand, many large UK companies have a lot of overseas revenues, so if the pound goes up, their revenues would probably go down, and hence the UK FTSE.

So does my strategy of buying only UK funds (funds that invest in UK companies, not just UK domiciled funds) really make sense?

........

For large companies it doesnt make sense because such companies are tradeable on a number of exchanges. The global market will ensure that 1 share in say Shell is worth the same no matter where that share is bought, and if currency values change the share values will change as well. This will filter down to smaller companies - eg is Shell worth x times M&S say.

In any case, you are investing for the long term. You may think the pound is undervalued now, but in 10 years time economic circumstances could change such that even if the exchange rate remained constant you would no longer hold that belief.