Managing Currency Ups & Downs
Luc de la Durantaye, Managing Director, Asset Allocation and Currency Management, CIBC Asset Management
"I think it's important to remind investors that it's been proven time and again that global diversification, including a broad exposure to a basket of foreign currency, has actually helped diversify their portfolio and reduce volatility over time, from a Canadian investor’s perspective. Much like trying to time specific stocks in and out, timing specific currencies in and out is a very difficult thing to do successfully, and unless you're someone that can dedicate a lot of time to it, that's something that we wouldn't recommend being done on a regular basis."
Global indices not diverse from a currency perspective
"When you think about a stock portfolio, like an index, the S&P 500 has 500 stocks and the MSCI world has thousands of stocks. Yet when you invest, when you look at your underlying currency exposure, you will have high concentration in the U.S. dollar and the euro and the Japanese yen, which you wouldn't accept in a stock portfolio. In the MSCI world, you have close to, or over 50 percent of your assets that are concentrated in U.S. dollar exposure. So you end up with very concentrated currency portfolio, and the way we address that to some extent is that we diversify the portfolio away from some of these large currencies and invest into stronger fundamentally based currencies which improve the overall diversification of the portfolio and adds value over time."
Managing currency in a balanced portfolio
"How do we how do we manage currency in a balanced portfolio is was much like managing an equity portfolio, which is we pay attention to the fundamentals of each country's currency, and we reduce the currency exposure of countries with poor or weak fundamentals, and increase currency exposure in countries that have strong currency fundamentals, and that creates added value to the portfolio by having appreciating currencies in the portfolio and reducing currencies that are likely to depreciate."
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