Are worldwide funds currency-hedged?

Ash_Pole

I've got enough invested in the UK via a few funds and my pension. I want to diversify more into global equities.

I'm nervous about the exchange rate. I feel that the pound will bounce back when eventually you-know-what is resolved (I don't want a discussion on this though!).

Are overseas funds typically exchange rate hedged, or does it vary fund by fund? I'm thinking specifically of a Vanguard index fund.

george4064

Some global funds are hedged and some are unhedged.

Typically with global passive equity funds, it will state in the fund name if its hedged or not. Note that some funds can be partially hedged, for example 50% or 75% hedged etc.

If in doubt, have a further investigation in the factsheet/relevant document to check the level of currency hedging (if any).

Linton

In general funds are not hedged, if they dont say they are hedged they wont be. Equity funds more rarely than bonds. It isnt a great issue in my view especially if you are investing in broad trackers.


Shares in the world's major companies are traded globally. Therefore they will effectively be priced in an averaged basket of world currencies (primarily $s). If the £ rises the price of a US oil company such as Exxon Mobil(Esso) will fall in £ terms. But then so will the price of a comparable oil company such as Shell although it is quoted in £s on the London Stock Exchange. After all why should the global value of Shell to the worlds investors increase just because the value of the £ has increased, Shell does most of its business outside the UK. So if you currency hedge Exxon, you should also currency hedge Shell, which is rather difficult, and is presumably something you havent considered doing.


Will hedging reduce equity risk anyway.? The theory around hedging presumably is based on the assumption that a company should hopefully have a steadily increasing "real" price which is being perturbed by annoying changes in currency values. However for global companies this cannot be the case since global currency movements are already hedged because of the environment in which they operate. ISTM adding in fund hedging is increasing the effect of currency fluctuations.


Lets take an example. Look at a global Japanese company, say Toshiba. It does most if its business outside Japan. If the Yen falls against other currencies including the £ Toshibas profits in Yen will increase and so presumably will its share price in Yen. If your holding is hedged you will see an even greater increase in share price, once because the share price really did increase in Yen and then again because the value of the Yen decreased in £ terms. And the reverse would apply if the value of the Yen fell.

Thrugelmir

Linton wrote: »

If the £ rises the price of a US oil company such as Exxon Mobil(Esso) will fall in £ terms. But then so will the price of a comparable oil company such as Shell although it is quoted in £s on the London Stock Exchange. After all why should the global value of Shell to the worlds investors increase just because the value of the £ has increased,

Oil and gas is traded in US$ on the commodity markets. Shell pays it's dividends in €. Likewise you need to factor in whether revenue/profit is generated from upstream or downstream activities. The list goes on. The energy companies are similar but different.

AnotherJoe

I dont see the point in hedging, I take the view that ultimately currencies will do what they will do and you cant hedge against that long term, all you'll do is spend a lot on the way to pointlessly hedge.
Of course you can hedge for short periods of time but probably the best way to do that is to hang on to Sterling cash and buy world stocks when you think that Sterling has risen enough. hard to buy UK stocks because the bigger ones are effectively priced in dollars whatever their notional currency,

But again with that I take the view that I am not a currency futures trader so hanging on to sterling wont work for me. If my global stocks fall relatively well so be it. Its also hard to see a scenario where the pound rises and the world economy doesnt also, so my global stocks woudl rise just slower.

Linton

Thrugelmir wrote: »

Oil and gas is traded in US$ on the commodity markets. Shell pays it's dividends in €. Likewise you need to factor in whether revenue/profit is generated from upstream or downstream activities. The list goes on. The energy companies are similar but different.

Yes the companies will be different in detail. The point I am making (or trying to make) is that global companies are traded on a global market and therefore their price in whatever currency they happen to be traded will be the same at current exchange rates. The markets will move to prevent any benefit from swapping between between two global companies in the same line of business by buying and selling their shares in their local different currencies except for extremely short term trading.

Malthusian

If you are investing in a global fund it barely matters if Sterling rises and the Sterling value of the fund falls, because your Sterling will buy more of anything that has inputs from abroad, i.e. almost everything. Other things being equal your global assets will buy exactly as much global stuff regardless of how Sterling moves.

Unless you live on a self-sufficient Scottish island where everything is priced up in Sterling.

talexuser

AnotherJoe wrote: »

I dont see the point in hedging.

I agree with this. Hedging is for short term bets, global diversification investing should be for the long term and the chances are will give the best result without any foresight to correctly predict the "next big thing."

MarkCarnage

I did some research on this topic for a major UK pension fund about 4 years ago. The standard investment consultant advice was to hedge currency up to c70-80% for non £ equities.

In practice, the risk reduction (in terms of conventional measurement of standard deviation) from currency hedging for a £ based investor was fairly small - typically it reduced the SD by perhaps 1%, maybe from 18% to 17%. However, and importantly, the history shows that where there was a spike in vol from currency it was a positive impact for an unhedged UK investor due to the various devaluations of £ over the years.

The only significant case where it generally made sense to hedge was for a Swiss Franc based investor.

The costs and liquidity impacts of hedging should not be underestimated too. If a fund was significantly currency hedged in 2008 (GFC) or 2016 (Brex$hit), they would have faced significant settlement cash calls when the FX hedge matured.

In practice, the global nature of equity markets and companies' own sales and profits mean it's pretty hard to determine what level of hedge might even be appropriate without ending up overhedging. So I came to the conclusion it was generally not worth the candle.

DB pension funds used to over analyse currency hedge decisions, and ignore the real elephants in their front room, namely interest rate and inflation hedging which cost them far more.

Bonds on the other hand, yes it would generally make sense to hedge unless you explicitly wanted to take a currency risk too.

londoninvestor

MarkCarnage wrote: »

In practice, the global nature of equity markets and companies' own sales and profits mean it's pretty hard to determine what level of hedge might even be appropriate without ending up overhedging. So I came to the conclusion it was generally not worth the candle.

DB pension funds used to over analyse currency hedge decisions, and ignore the real elephants in their front room, namely interest rate and inflation hedging which cost them far more.

Really interesting. Did anyone ask you to look at how to hedge the implicit currency exposure in UK stocks? Because the UK market certainly rises as the pound falls, and if you're heavily focused on currency hedging, why stop at foreign stocks...?

(I wouldn't advocate this but putting myself into your clients' mindset, it does seem like the logical conclusion of a currency hedging approach for equity holdings...)

MarkCarnage

londoninvestor wrote: »

Really interesting. Did anyone ask you to look at how to hedge the implicit currency exposure in UK stocks? Because the UK market certainly rises as the pound falls, and if you're heavily focused on currency hedging, why stop at foreign stocks...?

(I wouldn't advocate this but putting myself into your clients' mindset, it does seem like the logical conclusion of a currency hedging approach for equity holdings...)

I looked at as many issues as possible including the above. Our equity portfolio was global, so UK listed was a small part. Main challenges were logistical - gathering the data from 7 different managers on a common basis, acknowledging it's both dynamic and very imperfect etc. To be fair to the investment consulting community, one of the reasons they suggested a cap of about 80% was precisely the issue you raise. My view was that the costs, both direct and indirect, probably outweighed the benefits. As I said in OP, it frustrated me the amount of time spent on this discussion, when there were many bigger fish to fry in risk hedging.....