Currency swings can wipe out significant potential returns and also add needless volatility for Canadian investors, says Toronto-based Criterion Investments Ltd., following new analysis of data from MSCI Inc.
Over the past three years, a Canadian investor holding the MSCI World Index without the benefit of currency hedging would have missed out on a total of 27% in returns, compared to a hedged investor holding the Index over the same period, Criterion says.
And that 27% performance differential is not just because of the recent rise of the Canadian dollar to parity against the U.S. dollar. About a third of the MSCI World Index is comprised of North American holdings, with the remainder covering other regions, and consequently other currencies across the globe.
For example, taking the U.S. dollar out of the mix and looking at four other key global currencies – the Euro, Japanese Yen, Swiss Franc and British Pound, the average variability was 15.3% against the Canadian dollar over the one-year period ending September 30, 2007. A currency movement of that magnitude could easily wipe out returns for an unhedged investor trying to time their purchase or sale of foreign investments, Criterion adds.
“Most Canadians do not currency hedge their global investments, implicitly making an all-or-nothing bet that the Canadian dollar will not strengthen versus foreign exchange rates,” says Ian McPherson, president of Criterion. “We do not believe that investors can accurately predict the direction of foreign exchange rates; consequently, it makes sense to hedge the currency exposure, eliminate the risk and avoid market timing.”
Criterion says its diversified family of five currency-hedged global funds provide the opportunity to invest outside of Canada while taking changes in global currencies largely out of the mix.
Criterion this year launched Canada’s first global clean energy fund and Canada’s first actively-managed global water infrastructure fund – both available as currency-hedged solutions.
Criterion is an affiliate of VenGrowth Asset Management Inc.
Currency adds real risk for global investors: Criterion Investments
- By: IE Staff
- October 18, 2007 October 18, 2007
- 10:25