If you have International Shares in your portfolio how does a rising Australian dollar impact on your investment value? When a managed fund that has overseas investments, such as a global shares fund, is unhedged, investors are exposed to fluctuations in the Australian dollar. This can be a good thing if our dollar falls relative to the currency in the country where the investments are held.
For example, if you were invested in an unhedged US share fund and the value of the Australian dollar decreased relative to the US dollar, then the value of your portfolio would increase. This is because you would receive more for your investment if you converted it back into Australian dollars. Of course it can also work the other way around. As the Australian dollar increases in value, the value of an unhedged overseas portfolio would decrease when converted back into Australian dollars. This can result in unhedged global share funds delivering low returns even when the underlying markets have performed quite strongly.
When an overseas portfolio is hedged, the investment manager is using strategies to offset the impact of currency fluctuations. The objective is to ensure the only factor influencing the return from the portfolio is the income and capital gains (or losses) generated by the underlying investments – not currency movements as well. This means with a fully hedged portfolio, you are protected from the adverse impact of a rising Australian dollar. But equally, you don't get to benefit from situations where the Australian dollar is falling.
Which approach is best – hedged or unhedged?
Over time the Australian dollar will both rise and fall relative to overseas currencies. Holding some hedged and unhedged overseas investments can therefore reduce the risk you face from either way currency movements.