By Keith Damsell
The Globe And Mail
Report on Business
Monday, July 10, 2006
The mutual fund industry is betting investors will want to make a wager of their own on the future of the Canadian loonie.
Adrian Mastracci, investment counsel at Vancouver’s ‘fee-only’ KCM Wealth Management, says, “There is a cost to hedging something and you may miss the opportunity for a higher return. On the other hand, if you are right, you may protect some of the capital.”
There has been a flood of new investment products that hedge currency, a tool that allows Canadians to invest in U.S. and international markets without exposing themselves to currency losses from a strong Canadian dollar.
On July 5, Phillips Hager & North Investment Management Ltd. launched the Currency-Hedged U.S. Equity Fund and the Currency-Hedged Overseas Equity Fund. Clients of the Vancouver fund company were leery of the overheated Canadian equity market and wanted to invest overseas but sought to mitigate currency risk, said PH&N president John Montalbano.
The PH&N funds follow the June launch of a trio of currency-hedged funds by Toronto's Criterion Investments Ltd., an affiliate of VenGrowth Assets Management Inc. And over the past year, Dynamic Mutual Funds and Mackenzie Financial Corp. have marketed new currency-hedged products to investors. Industry sources report that a handful of fund companies are poised to launch more currency-linked products in the weeks and months to come.
It's hard to argue the merits of currency hedging, especially when looking at the short-term performance of the U.S. market. The S&P 500 has had a nice ride since 2003 but returns have been eaten up by currency losses. For example, look at the well-regarded Dynamic Power American Growth Fund. For the three-year period ended May 31, the Canadian dollar version has an average annual return of 12.8 per cent; over the same period, the U.S. dollar version is up 21.2 per cent.
Financial advisers are wrestling with the issue. Some advice:
Currency hedging is a complicated, risky business.
"It's a double-edged sword," said Adrian Mastracci, a Vancouver adviser at KCM Wealth Management. "There is a cost to hedging something and you may miss the opportunity for a higher return. On the other hand, if you are right, you may protect some of the capital."
When considering hedging, take into account liabilities and current currency holdings. Hedging may make sense for retirees who spend a lot of time in the United States. Toronto adviser John DiNovo urges clients to finance their cost of living over a five- to seven-year period with Canadian dollar investments.
"I think it is really a function of what foreign content is as a percentage of the overall portfolio and moreover how this foreign content and exposure are achieved," said Adam Felesky. For example, the bulk of global equity funds and exchange-traded funds are overweight in the U.S. dollar and exposed to further erosion in its value, he said.
Invest for the long term. If you buy and hold a good U.S. or international fund for 10 to 15 years, currency fluctuations may be a wash. "The best defence long term is not necessarily hedging currency risk but maintaining a well diversified portfolio and rebalancing it on a regular basis," said Chris Reynolds.
Keep it simple.
"Buy good, profitable businesses at attractive prices, and hold them through market and currency fluctuations," said Blaine Dickson, branch manager. "Small investors have enough trouble maintaining commitment to their simple investment goals, never mind trying to have them commit to watching complicated, daily changes in currency."
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