Minimizing the Impact of Currency Fluctuations
The strength of the Canadian dollar can affect your portfolio.
It took 31 years, but in September 2007 the Canadian dollar
reached parity with the U.S. dollar. And in recent years, it's
also strengthened against all other major foreign currencies,
including the British pound, the Japanese yen and the euro.
What does the rising Canadian dollar mean to you?
The rising Canadian dollar can impact your investment performance,
particularly in the short term. However, you can manage this impact when you
understand how currency fluctuations can affect your foreign investments.
When you invest in foreign holdings, you actually make two investments:
- The investment itself (mutual fund, stock or bond)
- The foreign currency in which the investment is traded
For most Canadians, a rising loonie negatively impacts the
value of their foreign investments because those
investments are worth less when converted back into Canadian dollars.
Despite this, a strong loonie compared to the U.S. dollar means
you can consider U.S. investments to be "on sale" because it takes
fewer loonies to buy them. Looking at broader global markets, Canadians
have an excellent opportunity to diversify their portfolios by adding
high-quality foreign assets at reasonable prices.
How can currency be managed?
Investors in foreign markets can offset the impact of exchange-rate
movements on their investment returns through a process known as "hedging."
When the Canadian dollar is on the rise, hedging reduces the negative
impact of that increase in value. On the other hand, hedging offsets the gains investors
would have otherwise realized in times when the loonie's value is dropping.
How should currency shape your investment decisions?
Here are three things to think about when considering the impact of currency on your investments:
- What is your investment time horizon?
Over longer periods of time, currency fluctuations have been shown to
have little impact on stock market returns. Year-to-year currency movements,
however, can be significant - making investments
in foreign currencies a more critical consideration for short-term investors.
- Do you tend to make decisions based on short-term fluctuations
in the value of your portfolio?
Currency fluctuations can have either a positive or negative impact
on short-term returns. If short-term performance tends to influence your
investment decisions,
a currency-neutral solution may be appropriate to help you maintain discipline.
- How is currency managed in your investments?
Educate yourself on
how currency is managed in any fund before you make investment decisions. When
comparing funds, make sure they take similar or identical approaches to currency
management. Also remember that investment performance
and currency are different risks, and should be managed separately.
We can help minimize the impact of currency fluctuations on your portfolio.
RBC Asset Management offers currency-hedged (currency-neutral) versions of foreign
funds, such as the RBC U.S. Equity Currency Neutral Fund
and the RBC International Index Currency Neutral Fund, that reduce the impact of currency fluctuations on performance.
Portfolio managers dedicated specifically to the foreign-exchange market
implement hedging policies for all our funds. This approach ensures that our outlook for
foreign currencies is reflected consistently across all the funds we manage.
Talk to an advisor
today about the impact of currency fluctuations on your portfolio
and the options that are available to help you manage currency exposure.
