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But our priority remains picking great companies at attractive valuations and not letting the currency tail wag the investment dog .” He adds : “ I ’ m always conscious that wide valuation spreads can get wider still and stay so for a long time .”
Taken for granted Edward Allen , investment director at Tyndall , agrees with Edelsten ’ s last point , to some extent . However , he warns that investors often fail to appreciate their fortune when they benefit from currency movements , then find it painful when they are on the receiving end . “ One only had to look at the experience of US dollar-based clients , for whom almost any investment last year had to make 10 to 15 % in local currency terms just to return 0 %,” he says . “ In reality , falling markets have compounded negative currency movements , resulting in a painful experience only recently partially reversed .” As a result , he has shifted sterlingbased clients to hedged share classes in US investments where possible and reduced dollar exposure where this is impractical .
“ Don ’ t get me wrong , I think trying to call short-term currency movements is for the birds ,” he adds . “ However , over very long periods of time , currencies tend to trade within wide ranges and when we reach one extreme or the other , it has historically paid to sit up and take notice . If this sounds sufficiently woolly and unscientific , then I might add that on relative valuation measures ( such as purchasing power parity using the Big Mac Index ), sterling is undervalued versus the dollar by about 30 %.”
More harm than good Of course , nothing in the world of investment comes without some sort of risk , and this is also true of currency hedging . Stephen Anness , manager of the global equity income share portfolio of the
Invesco Select Trust , has the ability to use hedging , but has never taken it up . He notes that hedging costs money and , while it isn ’ t normally expensive , it can act as a modest drag on long-term returns . “ It adds another layer of complexity and risk to managing a portfolio , and for investors , that is arguably
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