In times of currency volatility, I’m often asked how we manage these movements within our investment portfolios. The answer hasn’t changed: We don’t hedge our foreign equity currency exposure, and we never have.
Stock selection trumps currency volatility in the long term
There are four main reasons we don’t hedge currency exposure in our portfolios:1
- Our view is that while foreign-currency exposure introduces some volatility in the short term, it does not have a significant impact on long-term volatility
- We also believe that one of the key benefits foreign securities provide to Canadian investors is to lower the correlation to the Canadian market – and if you hedge the currency exposure, you instead increase the correlation, thereby lowering the diversification benefit
- Hedging currency can also be largely redundant as many foreign companies have global operations with exposure to many different currencies, and they often hedge their own currency exposure directly. Due to this, simply hedging the home-country currency exposure of a company – just because of where it is domiciled – may not be effective; rather it might actually add additional risks
- Hedging is costly and, as discussed above, can introduce unwanted leverage to a portfolio
What matters most to the performance of our funds over time is stock selection. Regardless of the macroeconomic environment or currency movements, we remain focused on identifying attractive companies that fit our earnings, quality, valuation (“EQV”) investment process. This requires us to ask three main questions when analyzing a stock:
- Is its earnings growth sustainable?
- Is the company financially strong and generating attractive returns?
- Is the stock attractively valued?
In essence, we are much more concerned with what company management teams are doing than what central bankers are doing. We believe this focus is key to delivering long-term growth potential to our investors.