by Tom Bradley
In a recent Globe and Mail article, Rob Carrick talked about how investors can diversify their portfolios by buying U.S. and international stocks without taking currency risk (here's the link to the article, but unfortunately it's only available to Globe and Mail subscribers). He pointed readers to ETFs (exchange traded funds) that are currency hedged which “remove any worries related to currency fluctuations.” He didn’t mention it, but there are also many mutual funds that are currency hedged.
Rob pointed out, however, that many professional investors “avoid hedging in the belief that currency’s impact on returns over 10-plus years from foreign stocks tends to fade away.”
At Steadyhand, we agree with the pros in this regard. It costs money to hedge and currencies are impossible to predict. And there’s another important factor that’s influenced our view on hedging: currency movements, when combined with changes in bond and stock prices, smooth out returns for balanced portfolios. Broader industry and geographic exposure are important sources of diversification (we don’t have many technology, healthcare and consumer stocks in Canada), but a mix of currencies also plays a part.
We take a global view of investing, trying to erase the borders as much as we can. Our managers take currency into account when making buy and sell decisions but rarely do any hedging. We like it that way. We want to benefit from the only free lunch in investing — diversification (currency and otherwise).
As a final note, it’s worth mentioning that currency hedging tends to be more on the minds of investors when the loonie is rising sharply against other currencies and is detracting from the returns of foreign stocks. At times like that, emotions are running high, so it’s helpful to visit the topic during calmer periods like today.
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