Should You Consider Currency in Your Portfolio?

To hedge or not to hedge? Generally, there are three things an investor must consider when making the choice of foreign currency exposure

Tanguy De Lauzon 6 June, 2017 | 12:58PM

Investors spend a lot of time thinking about the return potential from different asset classes. Currency diversification plays into this decision-making process, yet the paradox of choice means that few investors fully consider the downside risk currency can have.

There are many ways an investor can uncover the ‘currency effect’, however one of the most effective methods is to simply look back through history at some of the worst-case scenarios.

Europe is very interesting in this regard and is topical given the recent political instability and concerns about the sustainability of the single currency. Since 1972, we have seen 11 periods where the European equity market fell by more than 10%; of which six fell by more than 20%. The question an investor should consider is whether foreign currency exposure would have a beneficial or detrimental impact and whether a hedging strategy would be helpful to reduce any currency risk.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Tanguy De Lauzon  is Head of Capital Markets & Asset Allocation for Morningstar Investment Management EMEA

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