How much exchange rate risk ?

beamyup

I am happy about the risk profile of my SIPP pension portfolio in terms of the mix, i am also very happy with the charges.

I am using II.

SIPP investments (about £500k) split between

• 50% - Fidelity Index World P Acc
• 20% - Vanguard Global Val Fac UCITS ETFUSDAcc GBP
• 30% - Vanguard LifeStrategy 80% Equity A Acc

according to morningstar x-ray my country exposure is around

• United States 56%
• United Kingdom 12%
• Japan 8%
• France 3%
• Switzerland 3%
• other - rest of world

My worry is around the exposure that I have to exchange rates, which are "good" at the moment.

How does anyone feel about this?

Do people worry about this / move investments to currency hedged funds?

AnotherJoe

I don't. Waste of time. Waste of money. In the long term either currencies move around an Equilibrium which means you paid for hedging which was pointless, or the currencies diverge one way or the other and hedging can't protect you from that either. And in either case hedging has decreased your growth pointlessly.
So just suck it up and live with it. In the last 40 years I've seen the Pound vs the dollar between near parity and 2 dollars to the Pound. What would be the cost to protect against those divergences over 20,30,40 years ?

OldMusicGuy

What AnotherJoe said.

[Deleted User]

Currency is only a tape measure one uses to measure value (rather than distance). Different countries use different “units” for measuring value and, yes, to make it more interesting units change over time.

What you are really holding is a bunch of companies and their real value is impacted primarily by the profit they are projected to make and, to a lesser extent, interest rates, taxes, tariffs, technology, minimum wage, trade pacts and a whole lot of other factors with currency being one of 7897644589952170000.

If you are ok with all the other factors, currency should be the least of your concerns. Having said this, you have a very large exposure to one particular country which has been doing really well for a long time. That’s a risk in my book.

jamesd

I have a bit in a hedged fund to protect against an increase in the Pound in the event of a brexit deal being done and reversing some of my currency-related gains. Mostly not hedged. I'm not a fan of long term hedging but am comfortable using some when particularly sudden adverse moves are much more likely than usual.

At the moment I think that a hedged global equity tracker is a better idea than an unhedged one.

beamyup

Thanks to everyone that has responded.

If GBP/USD changes by e.g. 20% does that correspond to a 20% change in the GBP value of the US part of my investment, all other things remaining equal? I guess that it must.

jamesd : can you give me an example of a hedged global tracker?

[Deleted User]

beamyup wrote: »

Thanks to everyone that has responded.

If GBP/USD changes by e.g. 20% does that correspond to a 20% change in the GBP value of the US part of my investment, all other things remaining equal? I guess that it must.

Not really. Say USD drops by half. Does it mean Apple shares lose half of the value? Not at all. They sell products all over the world. Even if the “value” of sales goes down in the states (although it will be corrected by inflation), total sales won’t go down all that much. And their US Labour costs and the cost of certain supplies will go down too sometimes profit margin might actually increase in real terms. Bonds would be a different matter.

It’s a hypothetical example but the real value of shares holds up very well during periods of high inflation

System

A global tracker with monthly hedging:
https://www.hl.co.uk/shares/shares-search-results/i/ishares-v-plc-msci-world-monthly-gbp-hedged
All this will really do is smooth exchange rate changes. The longer the term of the hedging then the more expensive it will be, and the cost of hedging Sterling at the moment has increased due to the increased perceived risk from Brexit. How far are you from retirement?

[Deleted User]

And if you are hoping to gain on short term exchange rate movements (e g due to GBP strengthening), this is speculative and you are playing against people who know what they are doing. Currency futures include probability of sudden changes and this will be reflected in the cost of hedging.

beamyup

mordko - thanks
I was thinking like this -

e.g.
I have 1 apple share which is currently worth $208, which is about £166
If apple shares remain at $208 but the exchange rate is now 20% less, I now have £133

Is that not correct? how come?

System

beamyup wrote: »

Thanks to everyone that has responded.

If GBP/USD changes by e.g. 20% does that correspond to a 20% change in the GBP value of the US part of my investment, all other things remaining equal? I guess that it must.

jamesd : can you give me an example of a hedged global tracker?

If you have 1,000 shares in a US company that have a price of $18.75 then if the exchange rate is $1.25 then the value of your shares is £15,000. If Sterling appreciates to $1.50 then the values of your shares falls to £12,500 (assuming that there is no change in the share price).