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Currency hedge

Financial discussion for any financial queries for Expats
Rob625
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Currency hedge

#254761

Postby Rob625 » September 29th, 2019, 2:36 pm

I live in Italy but my investments are still in the UK, mostly in an investment trust. When we moved, one job I meant to do was to look at transferring my investments into euro-denominated unit trusts or similar. A theoretical rational investor prefers to have his assets in the same currency as his expected liabilities, because otherwise he runs an extra risk, that the FX rate moves against him.

But it was September 2008, and the global financial crisis was not the right time to make big changes, so the task got postponed and I never got round to it. I am not too bothered, although GBP has gone down relative to EUR, because my investments were sound and have done well, and the FX hit averaged over 11 years is not a big deal. But at the back of my mind I think that I should really try to find a way of investing here that does what I want, a unit trust investing in global equities as well as other asset classes, denominated in EUR. The matter has become a little more urgent because this year I have inherited some more GBP. I have started to ask around, but I haven’t found anything that resembles the UK trust I like, Personal Assets Trust.

In theory I should be able to hedge the currency risk, but as far as I know this only becomes practical with much larger portfolios, say 10m GBP and up. I am talking about less than 1m.

So I have two questions. First, is there an affordable way to hedge? Second, does anyone know of a EUR trust that is at all similar to PAT?

Spet0789
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Re: Currency hedge

#254778

Postby Spet0789 » September 29th, 2019, 5:06 pm

Rob625 wrote:I live in Italy but my investments are still in the UK, mostly in an investment trust. When we moved, one job I meant to do was to look at transferring my investments into euro-denominated unit trusts or similar. A theoretical rational investor prefers to have his assets in the same currency as his expected liabilities, because otherwise he runs an extra risk, that the FX rate moves against him.

But it was September 2008, and the global financial crisis was not the right time to make big changes, so the task got postponed and I never got round to it. I am not too bothered, although GBP has gone down relative to EUR, because my investments were sound and have done well, and the FX hit averaged over 11 years is not a big deal. But at the back of my mind I think that I should really try to find a way of investing here that does what I want, a unit trust investing in global equities as well as other asset classes, denominated in EUR. The matter has become a little more urgent because this year I have inherited some more GBP. I have started to ask around, but I haven’t found anything that resembles the UK trust I like, Personal Assets Trust.

In theory I should be able to hedge the currency risk, but as far as I know this only becomes practical with much larger portfolios, say 10m GBP and up. I am talking about less than 1m.

So I have two questions. First, is there an affordable way to hedge? Second, does anyone know of a EUR trust that is at all similar to PAT?


You need to think about your investments differently.

PAT is a great example of a U.K. listed investment trust with very little GBP exposure. I can’t recall the exact allocation but the only holdings in PAT which are in GBP are the gilts - about 25%. Other than that, they hold T-Bills, Gold, TIPS (all quoted in USD) and some international high-quality equities.

As PAT operate a discount control policy, the share price will always ~ NAV. PAT could issue a EUR denominated share class but it wouldn’t make any difference to your investment outcome. It’s just a different unit for keeping score.

If you want to invest with complete safety in EUR, you’ll have to accept negative yields.

Rob625
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Re: Currency hedge

#254826

Postby Rob625 » September 30th, 2019, 9:07 am

You could be right.

The scenario that worries me is this. Brexit happens, and although the UK economy does well, it does so in part by letting inflation rise, and so GBP drops against USD and EUR. For me, that means another hit on the value of my capital. If I invest the newly inherited money in PAT the hit is even bigger.

But I like PAT, and that means that I think that they invest wisely. As you say, they have much more in US equities than UK. So in my bad scenario, the PAT share price in GBP should go up as GBP goes down against USD.

Maybe I will just but more PAT with the inheritance, after all.

Dod101
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Re: Currency hedge

#254832

Postby Dod101 » September 30th, 2019, 9:47 am

I was going to make the point that Spet0789 has just made. You need to look at the underlying investments not the currency the asset is quoted in. I am UK resident and was thinking of investing in a US share or two to get a spread of currencies but I actually have that or can get it by buying an IT with a big US exposure so it pretty well comes to the same thing. Many of us invested in London will have a pretty good international exposure if we look at where the underlying earnings come from.

If you held say City of London IT that would be different as it is almost entirely invested in the UK market, so it will certainly reflect the fortunes of sterling.

Dod


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