Hi PratickM,

Here's a link for you, followed by the article.

To tell you the truth, I have lost money in the Euro fund this year because it was unhedged. last year I made good money. Still overall I am up but not too much.

Investing in China and India I am up both years.

Canada has been up both years.

My suggestion is diversify. Even though my Europe fund lost this year all the other funds (Ok one more global real estate also lost) including resources have given good returns so my total portfolio is up.
Ever since 2002 since the CanD has gained value agnst USD, I have made money overall investing in unhedged funds. Most of my money has been in India, China, Canada and specialty funds like resources and precious metals.

I also have money in Global real estate and European funds, which made money last year but are losing this year.

But hey, read the article.


http://www.thestar.com/Business/article/259262

Should you hedge foreign fund bets?

Sep 22, 2007 04:30 AM
Rudy Luukko

What the markets gave, the slumping United States dollar mostly took away. That has been the story for many Canadian investors who have held U.S. or global equity funds in recent years.

The Canadian dollar's appreciation versus its U.S. equivalent has been nothing short of dramatic. At the end of August, our dollar fetched 94.7 cents (U.S.), up 47.5 per cent from 64.2 cents in August 2002. So far this month, the loonie has soared by about another nickel, reaching the heady heights of parity with the greenback during Thursday trading and again yesterday.

Unscathed by these currency movements were holders of fully currency-hedged funds. These funds provide exposure to foreign stock markets, but protect you against currency losses.

As an example of how choosing a currency-hedged fund paid off over the past five years, let's compare and contrast a pair of U.S. equity index funds offered by TD Mutual Funds.

TD U.S. Index Fund and TD U.S. Index Currency Neutral Fund have as their market benchmark the Standard & Poor's 500 index of U.S. large-cap stocks. The advantage in fees goes to the unhedged fund, which has a management expense ratio, or MER, of 0.53 per cent, compared with 0.85 per cent for the currency neutral fund.

But the latter fund more than made up for its higher MER with a five-year compound average annual return of 10.8 per cent. The fund's returns ranked within the top 25 per cent of all funds in its category over the period.

The unhedged fund fared slightly better than the median fund over the same period. But the five-year average return of 2.8 per cent trailed that of the currency-hedged sibling by a whopping eight percentage points a year.

Some funds actively manage their currency exposure, with the extent of hedging depending on the managers' views. Increasingly, though, we are seeing Canadian fund companies draw clear distinctions between hedged and unhedged funds.

Among the newer players in the pro-hedging camp is Criterion Investments Ltd., a Toronto firm that launched a family of currency-hedged mutual funds in June of last year. Criterion contends currency movements aren't worth gambling on, that they are volatile and unpredictable and do not compensate investors adequately for taking currency risks.

Fund managers who don't hedge admit that risks exist. But these managers believe the gains and losses tend to even out over the long run. Stock-picking skills have a far greater impact on fund performance than currency management, these managers argue, especially if the fund is investing in various countries with different currencies.

"Over the long term, we don't think hedging adds any value," says Oliver Murray, president and chief executive officer of Brandes Investment Partners & Co., which has a policy against hedging currencies. Brandes's foreign equity funds have generally performed well over periods of 10 years or longer, though currency-related losses have cut into the returns more recently.

The flip side of currency risk, of course, is that when the loonie loses altitude, holders of unhedged foreign assets get a currency-related sweetener. So, if your investments are subject to foreign currency fluctuations, that's not necessarily a bad thing.

Ask yourself this: do you want all of your currency exposure to be tied to the loonie, which has an exchange rate heavily influenced by oil and other volatile commodity prices? If not, holding unhedged mutual funds remains a perfectly reasonable strategy.



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Rudy Luukko is investment funds editor of Morningstar Canada. He can be reached at rudy.luukko@morningstar .com via email.

BTW PratickM

To my knowledge, most funds in Canada do not have a hedged and non-hedged version. The norm is non-hedged.