Cross-border investors can be diversified by asset class and still be exposed to a currency mismatch. Currency strategy begins with the currencies of future spending and liabilities, not with a forecast of which exchange rate will move next.
Identify the investor’s economic base currency
The practical base currency is often the currency in which the investor expects to spend, pay taxes or meet liabilities, although internationally mobile families can have more than one. That liability profile provides the reference point for evaluating foreign-currency exposure.
An investor living in the United States but planning a large future purchase in the United Kingdom, for example, has a sterling liability even if most current assets are held in dollars. Currency planning can recognize that obligation before the payment date approaches.
Separate asset diversification from currency exposure
Owning foreign companies can improve business and geographic diversification, but it also introduces currency exposure. The effect varies depending on whether the investment vehicle hedges currency, where the underlying company earns revenue and the currency of the investor’s liabilities.
Currency can sometimes diversify a portfolio and sometimes amplify risk. The appropriate exposure depends on the mandate rather than a universal preference for hedged or unhedged assets.
Hedging has costs and trade-offs
Currency hedges can reduce variability relative to a chosen base currency, but they can involve transaction costs, interest-rate differentials, collateral or operational complexity. Hedging can also remove gains that would have occurred from favorable currency movement.
For long-horizon growth assets, an investor may accept more currency movement. For a known liability due in a foreign currency, greater alignment may be more valuable. The purpose of the capital determines the decision.
Cross-border structure requires specialist coordination
Account eligibility, tax treatment, estate rules, fund registration and reporting can differ by jurisdiction. Investment strategy should not assume that a vehicle available in one country can be held or transferred efficiently in another.
Qualified legal and tax advisers should address those rules. The investment process can help organize the facts and ensure that currency and portfolio implementation reflect the advice.
Currency policy can be partial rather than all-or-nothing
Investors do not always need to choose between fully hedged and fully unhedged exposure. A partial hedge can reduce mismatch for known liabilities while retaining some diversification from foreign currencies. Different asset classes may also justify different approaches.
The policy can be linked to purpose. Capital reserved for a euro-denominated property purchase may deserve greater euro alignment than a global equity allocation intended for multi-decade growth. This keeps currency decisions connected to liabilities instead of short-term exchange-rate opinions.
A practical review checklist
- List the currencies of income, spending and major future liabilities
- Map the currency exposure of investment accounts and entities
- Identify foreign-currency obligations with known dates
- Review whether existing funds hedge currency
- Understand the cost and mechanics of any proposed hedge
- Coordinate cross-border implementation with qualified legal and tax advisers
Related capability: Cross-Border Investment Advisory.
This article is general information only and is not investment, legal, tax or accounting advice, an offer, or a recommendation to buy or sell any security or investment. Investment decisions should be evaluated in light of the investor’s objectives, circumstances, eligibility and jurisdiction. Investments can lose value, and past performance does not guarantee future results.