OVERSEAS INVESTMENT

Simple Example to Illustrate the Possible Currency Effect when Investing into a Market with a Different Currency from that of the Investor On January 1 a Sterling denominated fund subscribed by UK based investors to the extent of £50 million and investing into US companies buys US$75 million when the rate of exchange was £1 = US$1-50.

This sum is then used to buy shares in a range of US companies on the New York Stock Exchange. By December 31 the same year the market value of the US portfolio had risen by 20% i.e. from US$75 million to US$90 million.

During the year the US Dollar weakened against Sterling and by December 31 the exchange rate was £1 = US$2. The value of the fund at December 31 was - US$90 converted into Sterling at £1 = US$2 = £45 million · a fall of 10% ! Of course it can work in reverse too - if the US Dollar had strengthened, the performance of the fund would have been enhanced.

During the halcyon days of the Tokyo stock market in the sixties and seventies, many Japanese funds achieved remarkable performances e.g. over a twenty year span at that time it was not unusual for the value of units in such funds to have multiplied say 28 times. However, the stock market did not rise by such a large multiple during that period and typically a fund might have shown an increase in the value of the portfolio per share of say 7 times. However, the Japanese yen increased in value against Sterling by say 4 times too. And as we all know 4 x 7 = 28 !