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Buying dollar-denominated investments as a hedge against a weak pound
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hallmark
Posts: 1,463 Forumite
Sterling has done very well vs the dollar over the last two years, up from a low of $1.08 to $1.34
I'm not optimistic on Sterling over the next few years. Also I view the upside as limited but the downside risk as far greater (in other words I could imagine a run on the pound but don't think there's too much chance of sterling going on a massive climb).
In addition, I tend to think in general a strong pound is good as imports (most stuff) ought to be cheaper. And it would tend to mean the economy must be doing OK.
So as a way to slightly hedge this risk I've been thinking about what investments would do well (at least currency-wise) if the pound was to fall versus dollar.
I've come up with this list initially:
I'm not optimistic on Sterling over the next few years. Also I view the upside as limited but the downside risk as far greater (in other words I could imagine a run on the pound but don't think there's too much chance of sterling going on a massive climb).
In addition, I tend to think in general a strong pound is good as imports (most stuff) ought to be cheaper. And it would tend to mean the economy must be doing OK.
So as a way to slightly hedge this risk I've been thinking about what investments would do well (at least currency-wise) if the pound was to fall versus dollar.
I've come up with this list initially:
Gold, or an unhedged physical gold fund such as this
Most commodities, or a commodity fund such as this:
Funds such as this version of Fundsmith, which IIUC has lots of it's holdings in dollar-demoninated shares and isn't hedged
Dollar-demoninated index funds, this being just an example
Dollar-denominated bond funds such as this
https://www.ajbell.co.uk/market-research/LSE:IDTG
This is hardly an area I'm an expert on but does anybody see any issues with that list? Any other suggestions for things that could go on it? Does anybody else think along these lines?
Finally I appreciate that my opinion on how well or badly sterling might fare is perfectly likely to be wrong and no better than any other view, it's just what I think (and as I say, I tend to view sterling strengthening as a good thing even if it meant certain investments fared worse than they might have).
cheers
This is hardly an area I'm an expert on but does anybody see any issues with that list? Any other suggestions for things that could go on it? Does anybody else think along these lines?
Finally I appreciate that my opinion on how well or badly sterling might fare is perfectly likely to be wrong and no better than any other view, it's just what I think (and as I say, I tend to view sterling strengthening as a good thing even if it meant certain investments fared worse than they might have).
cheers
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The other side of the coin is that many factors in the USA could determine the direction of travel of the exchange rate. US $ is weakening against many other currencies. Better to remain focussed on what you can control rather than what you can't. The post GFC July 2007 era of turbocharging investment returns (with the benefit of falling £) is most certainly over.1
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Agree with your assessment of sterling's medium term prospects and wisdom of holding dollar denominated assets and indeed dollar currency as an asset class in its own right.hallmark said:Sterling has done very well vs the dollar over the last two years, up from a low of $1.08 to $1.34
I'm not optimistic on Sterling over the next few years. Also I view the upside as limited but the downside risk as far greater (in other words I could imagine a run on the pound but don't think there's too much chance of sterling going on a massive climb).
In addition, I tend to think in general a strong pound is good as imports (most stuff) ought to be cheaper. And it would tend to mean the economy must be doing OK.
So as a way to slightly hedge this risk I've been thinking about what investments would do well (at least currency-wise) if the pound was to fall versus dollar.
I've come up with this list initially:Gold, or an unhedged physical gold fund such as thisMost commodities, or a commodity fund such as this:Funds such as this version of Fundsmith, which IIUC has lots of it's holdings in dollar-demoninated shares and isn't hedgedDollar-demoninated index funds, this being just an exampleDollar-denominated bond funds such as thishttps://www.ajbell.co.uk/market-research/LSE:IDTG
This is hardly an area I'm an expert on but does anybody see any issues with that list? Any other suggestions for things that could go on it? Does anybody else think along these lines?
Finally I appreciate that my opinion on how well or badly sterling might fare is perfectly likely to be wrong and no better than any other view, it's just what I think (and as I say, I tend to view sterling strengthening as a good thing even if it meant certain investments fared worse than they might have).
cheers
However, a criticism of the dollar based A J Bell etfs mentioned in your links above, is that Bell converts all your foreign purchases back to sterling, you cannot retain it on your account in the original currency.
As far as I am aware, Interactive Investors is one of the very few platforms that allow you to buy foreign assets in their domestic currency ( US dollars, Canadian dollars, Euros, Swiss francs etc ) and retain those investments in the original currencies together with any dividend income derived therefrom.
This allows me to retain foreign currency denominated assets at my discretion and time my own disposals to benefit from occasions when sterling is riding lower. For uninvested currency ( US dollars, Euros and sterling) , II currently pays interest thereon at tiered rates starting at 1.75%.
However, They do make a currency dealing charging if using sterling to make a purchase, so on say a US 10,000 dollar share purchase the conversion rate would today be US1.319 to the pound, clipping 0.011cents off the current 1.33 exchange rate.
Right now having already made pass share purchases on this basis ( Amazon , Berkshire Hathaway B shares ), I will also look at the array of dollar denominated etfs to build up more of a diverse dollar currency exposure.
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Correction, the clip was 0.021 cents, just noticed sterling hit 1.34 today.poseidon1 said:
Agree with your assessment of sterling's medium term prospects and wisdom of holding dollar denominated assets and indeed dollar currency as an asset class in its own right.hallmark said:Sterling has done very well vs the dollar over the last two years, up from a low of $1.08 to $1.34
I'm not optimistic on Sterling over the next few years. Also I view the upside as limited but the downside risk as far greater (in other words I could imagine a run on the pound but don't think there's too much chance of sterling going on a massive climb).
In addition, I tend to think in general a strong pound is good as imports (most stuff) ought to be cheaper. And it would tend to mean the economy must be doing OK.
So as a way to slightly hedge this risk I've been thinking about what investments would do well (at least currency-wise) if the pound was to fall versus dollar.
I've come up with this list initially:Gold, or an unhedged physical gold fund such as thisMost commodities, or a commodity fund such as this:Funds such as this version of Fundsmith, which IIUC has lots of it's holdings in dollar-demoninated shares and isn't hedgedDollar-demoninated index funds, this being just an exampleDollar-denominated bond funds such as thishttps://www.ajbell.co.uk/market-research/LSE:IDTG
This is hardly an area I'm an expert on but does anybody see any issues with that list? Any other suggestions for things that could go on it? Does anybody else think along these lines?
Finally I appreciate that my opinion on how well or badly sterling might fare is perfectly likely to be wrong and no better than any other view, it's just what I think (and as I say, I tend to view sterling strengthening as a good thing even if it meant certain investments fared worse than they might have).
cheers
However, a criticism of the dollar based A J Bell etfs mentioned in your links above, is that Bell converts all your foreign purchases back to sterling, you cannot retain it on your account in the original currency.
As far as I am aware, Interactive Investors is one of the very few platforms that allow you to buy foreign assets in their domestic currency ( US dollars, Canadian dollars, Euros, Swiss francs etc ) and retain those investments in the original currencies together with any dividend income derived therefrom.
This allows me to retain foreign currency denominated assets at my discretion and time my own disposals to benefit from occasions when sterling is riding lower. For uninvested currency ( US dollars, Euros and sterling) , II currently pays interest thereon at tiered rates starting at 1.75%.
However, They do make a currency dealing charging if using sterling to make a purchase, so on say a US 10,000 dollar share purchase the conversion rate would today be US1.319 to the pound, clipping 0.011cents off the current 1.33 exchange rate.
Right now having already made pass share purchases on this basis ( Amazon , Berkshire Hathaway B shares ), I will also look at the array of dollar denominated etfs to build up more of a diverse dollar currency exposure.1 -
Sadly, I am at rather a disadvantage to other people not having the faintest idea of where currencies and share prices are going in the next few months, years, or decades. Nor whether now is any riskier than any other time in the past 10 years or will be in the next 10 years and so deserves specific changes in strategy.
Therefore the best I can do is to attempt to invest as broadly as possible and let events take their course.
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Benchmarking against 2 years ago is pretty odd, as that was a bottom. If you used three years ago, today is still lower.0
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This is kind of what I'm getting at though, might there not be a risk that somebody could have invested very broadly in certain respects whilst being very tied to the fortunes of sterling. And therefore much less diversified than they think?Linton said:
Therefore the best I can do is to attempt to invest as broadly as possible and let events take their course.
I appreciate the argument that if you live in the UK then to an extent you don't mind how sterling fares compared to other currencies, because all your spending is in sterling, but surely it would no longer be quite so simple if the pound hit a real crisis?
As I say though, I'm not remotely an expert, it's more that logically this strikes me as a risk not often discussed.
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I just noticed sterling was doing well so compared it to it's worst price in the last 5 years.Altior said:Benchmarking against 2 years ago is pretty odd, as that was a bottom. If you used three years ago, today is still lower.
There's a simplistic argument that anything dollar-denominated is currently about 20% cheaper than it was at that point two years ago in pure currency terms, therefore it might not be the worst time to consider such investments.
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It's risky (or misleading) to cherry pick inflection points on a graph imv.
If that's the way you want to go, you could short the currency itself, without involving commodities or equities.0 -
Never fancied shorting tbh. However I am happy to slant/skew my investments to try to hedge the risk of a weak pound.0
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Cheaper to buy the stock but the dividends received (paid in US $) will be lower).hallmark said:
I just noticed sterling was doing well so compared it to it's worst price in the last 5 years.Altior said:Benchmarking against 2 years ago is pretty odd, as that was a bottom. If you used three years ago, today is still lower.
There's a simplistic argument that anything dollar-denominated is currently about 20% cheaper than it was at that point two years ago in pure currency terms, therefore it might not be the worst time to consider such investments.1
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