OVERSEAS INVESTMENT

The Currency Risk

The first thing to note is that funds may be denominated in a particular currency e.g. US Dollars, Euros or Sterling (meaning the currency to be tendered for the fund shares). If it is a currency other than your own you will only have an exposure to the currency of denomination to the extent that the fund itself continues to hold that currency. Normally, this is not the case (unless the fund is investing into that currency area) although a small amount of the currency of denomination may be held from time to time simply because it has not yet been invested or because cash is required to repay investors wishing to redeem their shares. Hence, the currency exposure to the currency of denomination of the fund is usually minimal.

So why do fund management companies denominate their funds in particular currencies which may well bear no relation to the currency of the country or countries into which the fund invests? It is simply a marketing technique. If the fund management company believes that most investors prefer to tender a particular currency (usually a significant international currency like the US Dollar or the Euro) then the fund will be denominated in that particular currency. It is a common mistake to believe that the currency of denomination presents a significant currency exposure. Currency exposure in fact arises when the territory into which the fund invests has a different currency from that of the investor. Obviously the investor measures returns in his or her own currency. Suppose a Sterling based investor buys into a fund investing in US companies.

It is not that important whether the fund is denominated in Sterling or US Dollars. If the investor has to subscribe Dollars to the fund then he will incur translation costs in buying the Dollars with his Sterling - a nuisance from the investor's viewpoint. If the investor has to subscribe Sterling then he will not incur such costs but the fund will - which the investor will therefore pay for indirectly. The fund will incur translation costs because in order to buy US shares it will need to settle in Dollars.

This is the point - when investing into a foreign market the fund will require local currency. As long as the fund remains invested in the US market there will be an exposure to the US Dollar.