Downside of strong dollar...global shares produced an average annual return of minus 4 per cent in the past decade.
Downside of strong dollar...global shares produced an average annual return of minus 4 per cent in the past decade.
Blame the terrible returns on international shares during the past decade on the Australian dollar. There was a dramatic dip in the value of the Australian dollar in 2008 and into early 2009, when sentiment about world economic growth was at its gloomiest, but otherwise it's been on a steady rise during those 10 years.
Most people access international shares through managed funds that allow the currency effects to flow through to investors.
The dollar's rise has more than sliced away the gains on overseas sharemarkets, leaving investors in the red.
During the 10 years to the end of March this year, international shares have produced an average annual return of minus 4 per cent.
With losses compounding during such a long time, the original sum invested 10 years ago would be worth about half today, after accounting for inflation.
But the same portfolio, hedged or protected from exchange-rate fluctuations, has produced an average annual return of about 3 per cent during the same period. The difference between hedged and unhedged is 7 percentage points each year.
Investors could be excused for thinking they had invested in a foreign exchange fund rather than an international share fund.
About half the typical portfolio will be invested in US-listed shares, as the US makes up about half of capitalisation of developed-word sharemarkets. That means the US dollar is the currency exchange rate with the biggest impact on the returns of the unhedged portfolio of international shares. A decade ago, one Australian dollar was buying about US50¢. Last week it was buying more than $US1.10.
After 10 years of losses, many investors will be wondering what they should do now. Assuming they still want the diversification benefits of global shares, should they switch to a fund that removes the currency effects on their returns? During the next few years you would think the Australian dollar will stay high because of the resources boom keeping commodities prices high and Australian interest rates relatively high. Given the Australian dollar is so highly valued now, if there was to be a change in the value of our dollar, it is much more likely to be down than up.
If that is right, there may be nothing to gain from being in an international shares fund that removes the currency risk. There may be more to gain from leaving the international shares exposure unhedged to benefit from any dips in the value of the Australian dollar.
Another approach may be to include more exposure to emerging markets. The typical global shares fund has only a small exposure to emerging markets. But shares listed in China and India and other emerging countries are likely to keep doing well. Perhaps the best option is to consider managers who actively manage the currency risk, have a decent exposure to emerging markets and are not afraid to invest differently to their peers. This approach is more likely to be found among, but not limited to, boutique fund managers who specialise in managing global shares funds.