More on FX hedging below, but to start with: Rob, i totally agree about the implicit indirect impact of USD when investing in a multinational. However, as you infer, this is something that is super tough to account for. I guess it’s similar to having unavoidable exposure to US politics/regulations given global interconnectedness. On the other hand, explicit currency exposure (e.g. Buying a share of Apple via USD) can be controlled.
Regarding the portfolio what is quite interesting is that US investors typically have a greater home bias than UK investors, i.e. For equities they invest approx 70% in domestic names versus UK’s 50% in domestic names. This results in lower hedging demand from US investors, but should raise an eyebrow for a UK investor.
Investment time horizon is quite crucial. It is generally a better idea to have at least some hedging in place for a shorter horizon than a longer one. Analysts tend to hold the view that currency movements should be almost flat through a long time horizon (>10yrs) - quite logical i.e. greater statistical probability of a flat move over a longer than shorter period. Economic cycles will also factor in here. So definitely a point to consider.
FX hedging is an interesting and often overlooked topic, not just with retail investors. While you might be tempted to want to be fully hedged, it is worth noting that you’re then taking a bet on GBP strength relative to the foreign currency. The closest to trying to take a neutral view would be to hedge 50% of the foreign currency, or what is referred to in the FX hedging space as the hedging ratio of “least regret”.
To hedge the foreign currency you essentially need to be short the foreign currency versus your home currency for the same period as your investment, continuously. You can do this by either using instruments like forwards, options or CFDs (there are costs of course - interest, spread, rolling over contracts…). However, another way is to simply buy into a hedged ETF. You could buy hedged and unhedged units (if available) to create a mix to suit your appetite for currency risk.
In saying that, a question for the FT team: Do you anticipate making hedged ETFs available at some point? Would be great to have that option. Operationally far easier than running a separate hedge and probably cheaper.
Well, I’m beginning my contribution to the community with a fairly length post, but purely out of child-like anticipation for the release. Happy Friday all.