Invesco Canada blog

Insights, commentary and investing expertise

Clas Olsson | March 16, 2016

Four reasons why we don’t hedge against currency volatility

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.

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Note: Clas Olsson is Senior Portfolio Manager, Managing Director, and CIO of Invesco’s International Growth Investment Management Unit, Invesco Ltd. Invesco Canada is an indirect subsidiary of Invesco Ltd.

1 The Invesco International and Global Growth team manages the equity portion of Invesco Canadian Balanced Fund and does not hedge the Fund’s foreign equity exposure. The Invesco Fixed Income team manages the fixed-income portion of Invesco Canadian Balanced Fund and will, from time to time, make currency-hedging decisions as a means of protecting capital.

Volatility measures the amount of fluctuation in the price of a security or portfolio. Correlation is the degree to which investments move in relation to each other. Diversification does not guarantee a profit or eliminate the risk of loss.

The risks of investing in securities of foreign issuers, including emerging-market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign-taxation issues. The investment techniques and risk analysis used by the portfolio managers may not produce the desired results.

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