How Currency Risk Affects You

Gain some control over an aspect of investing that otherwise can seem like a mysterious and powerful force

Gregg Wolper 16 November, 2012 | 11:39AM
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If you take the time to leaf through one of those big, densely-written fund prospectuses that land on your doormat every now and then, you'll see a long section called "Risks" that attempts to lay out every possible way the fund could end up disappointing you. A fund that invests in international securities may include "currency risk" on that list. Sometimes that idea lands under a broader discussion of "foreign investment risk."

But what is currency risk? How important is it? What steps do fund managers take to address it, and how should individual investors think about it?

How Currency Moves Affect Returns
Currency strategies can be complex. In the prospectus sense, however, currency risk is straightforward: It means that currencies rise and fall over time. If you own securities denominated in foreign currencies, when those currencies lose value versus the pound sterling, you'll get lower returns from the securities than if the currency values had stayed flat or risen. For example, shareholders of an equity fund that has not hedged its currency exposure could lose money even if the stocks in the fund's portfolio rise in the local market.

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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.

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About Author

Gregg Wolper  is an editorial director and senior fund analyst at Morningstar.

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