State Street Global Advisors Whitepaper: Seven essential tips for managing currency risk

With investors increasingly looking to tap into larger and more varied opportunities afforded by international investments, Jonathon Shead, head of portfolio strategists, State Street Global Advisors Asia-Pacific, has prepared seven essential tips for investors looking to manage currency risks.

As part of his role, Jonathan assists in the development, marketing and maintenance of a range of investment strategies with a particular focus on passive currency and passive equities.

In the attached whitepaper, Seven Essential Tips for Managing Currency Risk, Jonathan provides insight into how investors can not only manage but use currency movements to their advantage.

Seven Essential Tips for Managing Currency Risk

1. Playing short-term currency movements is difficult, even for the experts. Unless you are particularly skilled in foreign exchange, set a long term strategy and stick to it.

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 client’s 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. Be patient. Currencies can move away from fair value for long periods of time, and picking short term currency movements is notoriously difficult. Currencies can move quickly in both directions. Unless you are a foreign exchange expert, avoid rebalancing too often or too quickly in response to currency movements.

7. Understand how much foreign currency exposure each client has across their entire portfolio. Consider the impact of exchange rate movements at the portfolio level, rather within individual asset classes.

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