Imagine you’re looking at a fund that invests in Thailand. You’re a British investor and what ultimately matters to you is your investment return in sterling.
The fund has two share classes, one in sterling and the other in US dollars. You have a negative view on the dollar, expecting it to fall against sterling in the year ahead. Which of the fund’s two classes should you buy?
Many investors – even experienced ones – will say the sterling class. But in most cases, it makes absolutely no difference. You can pick either and you will end up with the same return in sterling terms.
If that’s not immediately obvious to you, you’re not alone. Currency risk of foreign currency-denominated funds is one of the most misunderstood parts of international investing.
The key point to understand is that the currency a fund is quoted has no impact on returns by itself. What matters is your domestic currency and the currency of the underlying assets that the fund holds.
In this article, I’ll demonstrate why that’s true – and explain why many funds still offer multiple currency classes anyway.
Continue reading »