Investing Abroad

Graeme7777

Hi,

I am based in the UK and earn and live in GBP.

I am interested in investing in a number of shares but these will overwhelmingly be, in value terms, US-based companies with share prices denominated in USD.

Making this choice will mean that a lot more than half of my investment portfolio is denominated in a currency different to the one that I use for daily life.

Does anyone have any thoughts on such a mis-match of exposure? I appreciate that I will take on currency risk but would expect that over the longer term - my ideal holding period - that these stocks would do very well.

Thanks!

Thrugelmir

Portfolio construction is a personal choice. Holdings in foreign currency will magnify market volatility along with eventual realised profits and losses. 

As for future performance of the individual stocks. What do you know that the thousands of people that follow US stocks closely don't. 

dunstonh

Does anyone have any thoughts on such a mis-match of exposure?

Great when Sterling was going down.  Not so great now that Sterling is rising again.

but would expect that over the longer term - my ideal holding period - that these stocks would do very well.

Quite possibly they will.  Although PE ratios in the US are now higher than the great depression and only second to the period before the dot.com crash.   So, they better be good.

Eyeful

You know that is just what many in the US thought as well here:
https://www.getrichslowly.org/bull-bear-markets/

bd10

FX exposure you cannot get rid off. Whether you buy directly or via funds/trusts, someone somewhere will have to make a currency conversion. The problem is this: Suppose we expect USD to weaken in the months/years to come which is not unreasonable at all. If we put on a hedge via derivatives, that'll have some value date in the future. Then what to do? Keep rolling the position? Meanwhile we'd have daily MTM, possible margin calls if USD were to appreciate and we're short. That's just messy oh and besides we'd need to entertain a margin account with zero interest/yield just to keep the futures going. Even if we could somehow deal a forward (for which we would need the credit lines and at retail level not an option), what tenor are we looking at? I bought some US value papers last summer too with the plan to keep them. For how long, honestly, don't know.

From a practical point of view: USD may depreciate 10% (who knows, although I also expect USD weakness in the near term) if returns on the stock bought exceed that, not a problem. At some point, the Fed will start offloading those bonds it's sitting on, rates will be picking up and in that part of the cycle USD is likely to appreciate again.

What I'm trying to say is this: I take FX exposure as given, it can't be properly managed, if one were to try, it's getting ridiculously expensive. If I recall Nick Train, he also in one of his interviews/podcasts that he doesn't care where FX might be going when he invests. It makes a lot of sense. A good value pick can have lots more upside than a 10% depreciation of the Dollar.

Thrugelmir

bd10 said:

 If I recall Nick Train, he also in one of his interviews/podcasts that he doesn't care where FX might be going when he invests. It makes a lot of sense. A good value pick can have lots more upside than a 10% depreciation of the Dollar.

The fund at the macro level will still minimise it's overall volatility. By holding a mixture of investments in major currencies i.e. US $. Yen, Euro and GBP.  There'll be a limit on exposure to any one market. 

AnotherJoe

Graeme7777 said:

Hi,

I am based in the UK and earn and live in GBP.

I am interested in investing in a number of shares but these will overwhelmingly be, in value terms, US-based companies with share prices denominated in USD.

Making this choice will mean that a lot more than half of my investment portfolio is denominated in a currency different to the one that I use for daily life.

Does anyone have any thoughts on such a mis-match of exposure? I appreciate that I will take on currency risk but would expect that over the longer term - my ideal holding period - that these stocks would do very well.

Thanks!

I think this is a false question, because if instead of separate shares you had a generic global fund, something like 95% of that would be in foreign currencies, it just wouldnt  be immediately noticeable because you are buying in GBP, but ultimately, theres an Fx cost you are paying its just hidden. Even if you only bought UK shares, then most of those will be greatly affected by Fx as well anyway.

So this is inescapable, so dont worry about that aspect of it.

What you might think about more is, are these long term buy and hold or are you trading? If you are trading you want an account where you can buy and sell in dollars (In your case) so you only pay teh Fx cost once, when you initially put GBP in. Then when you buy Acme in dollars and later sell, the dollars come back into your dollar account and you can buy Beta Corp in dollars without needing to have another FX cost twice.

Chino

The fund at the macro level will still minimise it's overall volatility.

The OP is "investing in a number of shares", not a in fund.

Thrugelmir

Chino said:

The fund at the macro level will still minimise it's overall volatility.

The OP is "investing in a number of shares", not a in fund.

Nick Train manages funds. 

Though the fundamentals apply equally to a well constructed portfolio. 

Graeme7777

Thank you all - lots of points to ponder!

chiang_mai

The US market is too big to buy funds and hope that you might have found one that will outperform, I think it's better to buy an index such as the S&P. And since you can buy into those funds in Sterling, why add the extra risk of currency exchange. I hold Legal and General US Index which tracks the S&P which is denominated in GBP.