Investment Ideas


Managing Currency Risk

Investing overseas opens the door to a vastly larger and more varied investment universe. This enables access to the growth potential of industries either underrepresented or unavailable on the Australian market and more effective portfolio diversification. But it also enables you to be exposed to a new risk: the movements of global currencies.

 

 


Experience

1989

Managing Currencies Since


Assets

$162B

Assets Under Management1 1


Investment Team

14

Dedicated Portfolio Managers


Currencies Can Make You Money, But Also Lose You Money


If you invest in international assets, currency fluctuations can prove to be a mixed blessing.  Downward pressure on your local currency can benefit investors in times of home-grown economic collapses, which can help offset losses during market downturns. For example, during the global financial crisis, foreign currency exposure was an attractive source of returns as the Australian dollar came under extreme pressure.

But a strong local currency can also erode foreign equity gains. So, if you’re investing overseas, you need to be aware of your currency risk exposure and how best to manage it.  

To Hedge or Not to Hedge?

When looking to manage currency risk, you may ask yourself: should I hedge my foreign currency exposure, removing the effects of exchange rate movements altogether? Or should I seek to turn it to my advantage?

We believe the key is to achieve the right balance between the two dimensions of currency strategy: reducing currency risk and maximising long term returns. To do this, you should target the right hedging level across your total portfolio. We offer seven essential tips to develop the right strategy to not only manage currency movements, but use it to your advantage. 


Seven Essential Tips for Managing Currency Risk


  1. Playing short term currency movements is difficult, even for the experts. We recommend setting a long term strategy.
  2. Choose a strategy that suits your base currency. A strategy that suits a US or UK investor may not suit an Australian investor.
  3. Investors commonly hedge 100% of the currency risk for defensive international investments like government bonds. For these assets, history suggests that removing currency fluctuations dramatically improves the stability of returns.
  4. In contrast, Australian-based investors who focus solely on reducing volatility will tend to only hedge a small part, if any, of their international share investments.
  5. Be aware of whether the Australian dollar is at long term highs or lows when setting a currency strategy. Remember to consider the GBP, EUR and JPY exchange rates as well as the USD — and be aware that ‘long term’ in this case means a decade, not a year.
  6. Avoid rebalancing too often or too quickly in response to currency movements. Currencies can move away from fair value for long periods of time, and picking short term currency movements is notoriously difficult. 
  7. Understand how much foreign currency exposure you have across your entire portfolio. Consider the impact of exchange rate movements at the portfolio level, rather than just within individual asset classes.  

To understand how to Manage your currency risk click here, alternatively speak to your investment professional.


SPDR ETFs: Invest Globally and Adjust Currency Exposure


Historically, managed funds were one of the few options that could offer investors direct control over their currency exposure, typically via a simple choice between hedged or unhedged versions of a product. 

The arrival of ETFs has opened the playing field for more currency-savvy investors. With hedging built into the fund itself, investors are able to adjust currency exposure across the portfolio.

SPDR ETFs can offer you access to diversified foreign investments. They also provide you with the flexibility to select investments that are aligned to your investment strategy, the ability to adjust asset allocations and rebalance portfolios quickly and easily, and the simplicity and transparency of an investment in Australian shares. 


We Launched Australia’s First Hedged ETF


We pioneered ETFs as a simple, cost effective means of investing in the performance of market indices, with all the benefits of listed market liquidity.

In 2013 we developed and launched the SPDR S&P® World ex-Australia (Hedged) Fund, which is Australia’s first ETF that provides Australian investors with access to international equities while mitigating currency risk.

The hedged ETF enables investors to diversify their portfolio with exposure to over 1,600 international quities in sectors that are either unavailable or more difficult to access in the Australian marketplace, while minimising the impact of currency changes on the value of their investment.


Insights


 

ETFs: a low cost, Simple, and Tax Efficient Investment for SMSFs

Typically structured like managed funds, but listed and traded on an exchange like stocks, ETFs are flexible trading and investment vehicles that can be used to help the Self-Managed Superannuation Fund investor satisfy several critical investment needs.

State Street Global Advisors, as of March 31, 2019. The currency AUM includes all currency overlays managed by State Street Global Advisors’ currency team.  The currency AUM reported by State Street Global Advisors at a firm level reflects the currency overlay from external accounts only and does not reflect internal accounts where State Street Global Advisors manages both the underlying assets and the currency overlay. Diversification does not ensure a profit or guarantee against loss.


Important Information

Risks associated with equity investing include stock values which may fluctuate in response to the activities of individual companies and general market and economic conditions. Companies with large market capitalisations go in and out of favour based on market and economic conditions. Larger companies tend to be less volatile than companies with smaller market capitalisations. In exchange for this potentially lower risk, the value of the security may not rise as much as companies with smaller market capitalisations. Investments in mid-sized companies may involve greater risks than in those of larger, better known companies, but may be less volatile than investments in smaller companies. Investing in foreign domiciled securities may involve risk of capital loss from unfavourable fluctuation in currency values, withholding taxes, from differences in generally accepted accounting principles or from economic or political instability in other nations. Currency Hedging involves taking offsetting positions intended to substantially offset currency losses on the hedged instrument. If the hedging position behaves differently than expected, the volatility of the strategy as a whole may increase and even exceed the volatility of the asset being hedged. There can be no assurance that the Fund’s hedging strategies will be effective. Currency Risk is a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged.