PORTFOLIO POINT: Australians investing offshore earn precious extra income if they choose to hedge away their currency exchange rate risk. This applies not just to fixed interest but also to equities, property and even gold and other commodities.
Australians invest more than $50 billion in overseas equities and, according to Morningstar figures for retail managed funds, 86% of this is invested using unhedged Australian dollars. Over the past several years this has been a costly positioning as the Australian dollar has strengthened against most other currencies, thereby depressing returns from otherwise stronger performing overseas markets. What might be surprising is that even in 2011 – when the Australian dollar coincidentally started and finished the year worth $US1.02, 65 UK pence and about 78 euro cents – currency-hedged overseas investments enjoyed an average extra 3% income return. Very few Australian investors realise that not only does it not cost to hedge your currency risk, but those who do so earn precious extra income. This is thanks to the Reserve Bank keeping our benchmark interest rates high and is a retail form of the popular institutional investor "carry trade". Let me explain how this benefit works and raise several intriguing implications this has for your portfolio.
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