TORONTO, October 18, 2007 – Currency swings can wipe out significant potential returns and also add needless volatility for Canadian investors, says Toronto-based Criterion Investments Limited (“Criterion”), following new analysis of data from MSCI Inc. (“MSCI”).
Currency ups and downs can damage returns
Over the past three years, a Canadian investor holding the MSCI World Index, a standard benchmark of global investing, without the benefit of currency hedging would have missed out on a total of 27% in returns, compared to a hedged investor holding the Index over the same period. That’s a hefty price to pay for an easily-avoidable risk.
Hedged vs. unhedged Canadian investor in MSCI World Index
(The growth of $10,000 from Sep. 30, 2004 to Sep. 30, 2007)
It’s not just C$ vs. US$ - other world currencies play a major role
That 27% performance differential is not just because of the recent rise of the Canadian dollar to parity against the U.S. dollar. About a third of the MSCI World Index is comprised of North American holdings, with the remainder covering other regions, and consequently other currencies across the globe.
For example, taking the U.S. dollar out of the mix and looking at four other key global currencies - the Euro, Japanese Yen, Swiss Franc and British Pound, the average variability was 15.3% against the Canadian dollar over the one-year period ending September 30, 2007. A currency movement of that magnitude could easily wipe out returns for an unhedged investor trying to time their purchase or sale of foreign investments.
Hedged investor outperforms unhedged investor over last decade
Global equity returns are greatly impacted by fluctuating currencies. The following graph compares the rolling three-year performance of a currency-hedged investor in the MSCI World Index against the performance of an unhedged investor over the past 10 years. The hedged investor achieved superior returns more than 60% of the time.
Three-year performance numbers were used since that is the average holding period for Canadian mutual fund investors.
Rolling 3-year performance of hedged vs. unhedged investor in MSCI World Index (Jan. 1, 1997 to Sep. 30, 2007)
“Most Canadians do not currency hedge their global investments, implicitly making an all-or-nothing bet that the Canadian dollar will not strengthen versus foreign exchange rates,” says Ian McPherson, President of Criterion. “We do not believe that investors can accurately predict the direction of foreign exchange rates; consequently, it makes sense to hedge the currency exposure, eliminate the risk and avoid market timing.
“Canadians deserve to be compensated for the extra risk that currency exposure adds, but they’re not. Most investors don’t have the 20-25 years it can take for currency fluctuations to ‘wash out’, so it simply makes sense to take currency risk off the table. Think of currency hedging as inexpensive partial ‘portfolio insurance,’ which enables Canadians to participate in global markets without the added volatility of exchange rates,” says McPherson.
Criterion offers innovative suite of currency-hedged solutions
Criterion has a diversified family of five currency-hedged global funds, providing Canadians with an opportunity to invest outside of Canada while taking changes in global currencies largely out of the mix. For example, Criterion Global Dividend Currency Hedged Fund is currently a top performer among its peers (mostly non-hedged), returning 8.7% year-to-date, 13.2% over one year and 13.4% since inception as at September 30, 2007. Criterion this year launched Canada’s first global clean energy fund and Canada’s first actively-managed global water infrastructure fund – both available as currency-hedged solutions.