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Foreign Fund Performance Risks by Edward A. Maclean, M.B.A., C.E.T., C.M.C.
June 2003
One of the questions I’m frequently asked by clients these days is why their foreign funds seem to be doing so poorly.
Well, it has to do with exchange rates. You see, for most investors, U.S. funds are held, and reported, in Canadian dollars. If the value of the U.S. fund stays the same and the Canadian dollar drops relative to the U.S. dollar, it makes the U.S. funds in your portfolio look larger. Conversely, and most recently, as the Canadian dollar rises relative to the U.S. dollar, U.S. mutual funds held in Canadian dollars seem to decrease in value.
Since early fall 2002 to spring 2003, the Canadian dollar rose from about $0.64 to almost $0.69, an increase of over 7%. (See chart below left – $CDN vs. US$).
What you see in your U.S. portfolio (in $CDN) is a corresponding drop, even in cases where the underlying funds haven’t fallen. (See chart below right – US$ vs. $CDN).
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The chart of your U.S. mutual fund most likely looks more like the chart on the right. You’re seeing the fund through the “exchange rate filter”. This same principle applies to other foreign funds. The Canadian dollar has been rising against the Euro since January.
So what’s the answer? What should you do? Well, that’s the timeless question. You can’t just ignore the global markets simply because of exchange rate risk. Endless studies and statistical analysis have shown that, overall, a properly balanced portfolio outperforms other strategies, such as chasing last year’s returns, with less risk.
The trick is making sure that your portfolio is balanced properly with your investment horizon (timeline) and risk tolerance in mind. With that done, you can sleep nights and be confident that, overall, you are maximizing your whole portfolio’s returns with an amount of risk that is right for your personal situation.
Your own best strategy is to stay active and informed about your investments and remember, your advisor is always available to discuss your portfolio content with you. |
