My super and investment portfolio is heavily exposed to unhedged US assets. While their performance has been really strong for the last few years, they have taken a mighty fall since the Covid-19 pandemic hit. I'm confident that the market will recover eventually, and I am a long-term self-investor. I notice that the US/Australian exchange rate is at near record lows so I was wondering whether a professional adviser thought this would be a good time to hedge my US portfolio? Should I also be putting more into that market at these depressed levels (investments and exchange rates)?
Scott in Hawthorn, Vic
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thanks for your insightful question, and good to see that you are thinking broadly on relevant areas such as currency and also the proper geographic mix. Certainly, you must feel justified on the exposure to the actual asset class since US shares, and the IT sector in particular is one that has bounced back rather nicely since the lows in late March. Notwithstanding the currency movements plays a part, the US market had fallen 33% approx from peak to trough, and as of now is only approx 13% down from its highs in February. This is no doubt working in your favour.
If history is a guide than there is a chance that the level of government money supply that is starting to flow to U.S. banks, corporations, and citizens may impact the U.S. dollar in a negative way. You only have to look back at the periods between 2010 - 2012 when our dollar was climbing to a high of around $1.10 to the greenback (hard to believe right) it was the hedged versions of international share funds, or ETF’s (exchange traded funds) that performed the best. Once the US dollar started to strengthen, it was the unhedged international holdings that were the strongest. Ten years ago today our dollar sat around 82 U.S. cents and once the Quantitative easing policies began to take effect in the United States, this had an impact on weakening the U.S. dollar vs most major western currencies. One cannot rely on past history to be a perfect forecasting of future returns or outcomes, however one approach we often suggest is to consider hedging your hedging position. Many fund managers, and ETF’s offer both hedged and unhedged positions, and we currently have a mix for our clients that is around 85% unhedged and 15% hedged. This is simply an addressing of the fact that there are so many unknowns at the moment. Firstly, from a medical perspective, and the fact that this pandemic has caused governments to act in fashions that we are not accustomed to at all. As such, what we once knew is being tested day in and day out.
No one can tell you definitively which way the U.S. dollar will trend relative to our currency let alone many others, especially in the uncertainty of the short-term policy measures that are impacting wildly the largest economies of the world. All the best in navigating these unique times.
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