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Does investing in GBP-denominated funds that hold overseas assets hedge against GBP c
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[Deleted User]
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edit: nvm, ignore please
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Correct.And so holding funds like this would actually expose me to the currency risk of the underlying asset's country, not the currency of denomination?
The currency of denomination is a way of keeping score in the currency of your choice. The actual value is in the assets you hold.
If the fund owns a Microsoft share worth $65 / £50, and the Microsoft share goes up to $130 because the americans think it is more valuable because it's making more dollars of profits every year, then the fund will become more valuable... in dollars. If the fund's only investment were Microsoft shares, it would double in value, in dollars. However, it would only double in value in pounds if the exchange rate stays the same. If the exchange rates change so that $2 is only worth £1 like it was some years back, then $130 is only £65 and the British investor has only made a 30% gain and not a 100% gain when he takes his fund shares and redeems them to get the pounds that the assets are worth.
It doesn't really matter if the US equity fund is priced in pounds or in dollars - it is just a number on a screen. If it is priced in dollars it will look like it has doubled in value but then when you convert the dollars back to pounds you have only made 30% gain instead of 100%. If it is priced in pound, they already do the conversion when working out the price, so you can more easily see that you have only made 30% gain, before you look up the exchange rates and work it out for yourself.0 -
bowlhead's answered your question. you didn't ask whether you should hedge currency when buying a fund that invests outside the UK; but i'll answer it anyway
IMHO, no, when the overseas investment is in equities.
the idea is to diversify away from the UK's economy, by owning a companies whose fortunes are less related to what happens in the UK. if you hedge currency, your investment's performance depends on what happens to the UK's currency.
e.g. suppose your fund holds shares in microsoft. the way i'd look at it is that you own 0.000001% (or whatever) of microsoft corporation, i.e. of that business.
it doesn't matter so much what currency that's measured in; if pounds are worth less, MSFT will be worth more pounds; if pounds are worth more, it'll be worth fewer pounds. but it's the real value of MSFT that matters.
if the real value of MSFT doubles, and at the same time the value of the pound falls dramatically, then if you didn't hedge the currency, the real value of your interest in MSFT will have doubled. but if you did hedge the currency, the value of your interest in MSFT will do less well than doubling. the point isn't that you might do worse by hedging - it could equally go the other way, i.e. the pound could soar, so your investment would more than double. the point is that the value of your investment is tied to the value of the pound; and the pound has some relation with the fortunes of the UK economy; and the idea of overseas investments is to diversify away from the UK.
there are also costs for hedging currency, so although currencies can move either way, you do on average lose a little by hedging.0 -
You are correct on both counts.
Recently US Funds have gone up a lot and that is for two reasons. Firstly the US economy is doing well and so the value of the stocks that the fund holds in dollars has risen.
Secondly, when you convert that back into pounds as those funds do every day, those dollars buy a lot more pounds than they used to.
I was always told that hedging is expensive and very easy to get wrong as FX markets can be very unpredictable - so retail investors don't bother.
For stock market investments a lot of people recommend some US focused funds, some Japan focused funds, some UK focused funds and then a small slice of property and emerging markets funds on top. That gives enough diversification so that if things go wrong in one currency/area then its generally balanced by better things happening elsewhere.
Some cash/bonds as well as stock funds then complete the picture.0
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