AIDAN BAILEY reports how currency fluctuations can veil the real issue of understanding the importance of an asset’s holding currency.

Following nearly a decade of stability, the recent volatility experienced in the Foreign Exchange Market (FX) has not only taken the financial world by surprise, it’s also upset the plans of international investors and expatriates.

          When planning finances across the globe it’s imperative to take the power of the currency into consideration. If you’re from the UK, living and spending in Singapore will have you thinking in terms of Great British Pounds (GPB) or Singapore Dollars (SGD). But if your long term goal is to retire in Europe, you really need to start building a portfolio in Euros (EUR).

          Currency management can be a mug’s game, so unless you have the utmost confidence in your research, never try to “time the exchange”. It’s always best to accumulate assets at a gradual and steady pace through regular savings or transfers of capital.  Set up regular transfer or deposit dates and stick to a predetermined action plan. Should certain external factors be advantageously aligned, you can always add lump sums on an ad hoc basis.

          When investing across currencies or converting currency always be wary of “red herrings”. A Euro investment policy which invests in European equities will not only expose you to the Euro, but also other European currencies outside of the Euro. Assuming the fund’s assets are spread among European stockmarkets and weighted according to relative capitalisation, this fund could carry 30 percent of its exposure to non-Euro denominated assets.

          Avoid being misled into believing a fund denominated in Euros offers added security over a fund in an alternative currency denomination. Once you strip away the denomination issue you’re left with the nature and currency of the underlying assets – this should be your real focus. If you believe the Euro will increase in strength, choose a Euro Currency Fund, Euro Bond Fund or a Euro Equity Fund.

Currency Case Study

Q. I invested US$100,000 in a USD denominated UK Equity Growth Fund and the USD/GBP exchange rate moved from 1.6 to 3.0. Should I be worried?   

A. Not at all, you’re actually protected because of the currency of the assets held within the fund. On making your initial investment, your cash was converted into a Sterling denominated asset: USD100,000/1.6 = GBP62,500. If the market had remained stable this wouldn’t have changed. But if you sell the assets now, your investment will be converted to cash at the new exchange rate of USD3 to GBP1. Therefore your investment would result in: £62,500 x 3 = USD187,500. A marked increase!

Aidan Bailey BA (Hons) CertPFS AWP^CM 

General Manager Singapore, International Division