Global shares can offer attractive opportunities, but currency movements can affect returns. Perpetual's JAMES HOLT explains how currency hedging can help investors manage their risk and return profiles
For Australian investors, global shares can offer access to some of the world’s best investment opportunities.
But returns from offshore markets are shaped by more than the movement of the underlying shares. Currency movements can also play a significant role.
When an Australian investor owns international shares, the final return in Australian-dollar terms reflects two moving parts: the performance of the shares themselves and the movement of the Australian dollar against the currency in which those shares are held.
If the underlying shares rise, but the Australian dollar also rises strongly, some of that gain can be reduced when returns are converted back into Australian dollars. Conversely, a falling Australian dollar can add to returns.
Perpetual’s new Barrow Hanley Global Share (Hedged) Active ETF (ASX: HEGL) gives investors additional choices in managing their global exposure by minimising the currency impacts, thereby leaving them with the exposure only to the stock movements themselves.
The stock selection remains the same; what changes is how the currency exposure is managed.
“It’s nothing to do with the stock positions – they’re identical. All we’re doing is offering one fund which gives full exposure to stock and currency movements. The new hedged Active ETF provides exposure to stock movements only and minimises – or ‘hedges out’ – the currency movement,” says Perpetual head investment specialist James Holt.
In simple terms, currency hedging aims to reduce the effect of foreign exchange movements on returns.
The hedged Active ETF does this using currency hedging instruments, such as forward contracts, which are commonly used to offset the impact of exchange-rate changes.
The result is that performance should more closely reflect the local currency returns of the underlying global shares, rather than being boosted or reduced by movements in the Australian dollar.
Why this matters for investors
This matters because currency can be a meaningful source of volatility in global equity portfolios.
Sometimes it works in your favour, but sometimes it can work against you. A portfolio may select the right stocks, but a move in the Australian dollar can still influence the final return received by local investors.
In periods where the Australian dollar strengthens, a hedged approach may help preserve more of the underlying share-market return. In periods where the Australian dollar weakens, an unhedged approach may benefit from the currency effect.
“You can actually get the stocks right and the currency wrong,” says Holt. “That’s why the currency decision can make a big difference.”
Positioning in the modern market
The key point is choice. Modern markets have evolved, and many advisers and investors now prefer to make their own decisions about currency exposure based on portfolio objectives, time horizon and market views.
Effectively the equity investment decision and the currency decision have been separated out. Having two different portfolios is a way of enabling these different views to be implemented.
By offering a fully hedged version alongside the unhedged strategy, the Active ETF gives investors another way to access the same global stock-picking capability while choosing how much currency exposure they want in their portfolio.
“We do the stock picking for them; how an adviser wants to implement currency for their clients depends on the client’s duration, time span and their own philosophy on currency,” says Holt.
In today’s environment, where interest rates, commodity cycles and global market leadership continue to shift, currency exposure can have a bigger impact than many investors expect.
A hedged global share Active ETF does not remove investment risk, nor does it guarantee higher returns. But it can help reduce one important source of uncertainty, allowing the underlying investment decisions to play a clearer role in portfolio outcomes.
“The stock picking is the same in both funds … the point is that you can wind up with quite different returns purely because of your currency decision,” says Holt.
About James Holt and Barrow Hanley
James Holt is head investment specialist in Australia for global value investor Barrow Hanley.
Barrow Hanley is a US-based global value investor manager specialising in value investing, using fundamental research to identify quality companies trading below their intrinsic value.
The Barrow Hanley Emerging Markets Fund is a high-conviction portfolio of emerging-market companies selected for their attractive valuations, strong fundamentals and identifiable potential for improvement.
The fund is managed by Barrow Hanley and offered in Australia through Perpetual.
