Fundsmith currency exposure risk

#1

All. looking at Fundsmith again as they continue to outperform- however currency risk is a worry as could wipe out profits. and this AndyWahol guy gives a example on ef thread . .

https://www.englishforum.ch/finance-banking-taxation/269891-question-regarding-fundsmith-7.html

what do you think. is valid concern?

#2

It’s a global equity fund… You eventually hold stocks from all over the world which have nothing to do with the British pound. If the pound really lost value, the value of the fund would just rise by an equal amount.

E.g. imagine if the fund just bought physical gold. Would it matter what currency they used to buy it?

#3

Ok interesting I see. . So this is only really a problem if you investing 100% with local companies in one country & currency and then change to other currency?

Eg. . 100% UK small cap in gbp- then later change to chf. Bad exchange rate could impact here?

Although this article says otherwise . .
https://www.am.pictet/en/globalwebsite/global-articles/2018/educational/demystifying-currency-hedging

#4

Do note that the Pictet article pertains to fixed income (most notably bonds) These instruments, as their name implies, promise you future payments that are fixed - in amount and currency.

Example: You buy a bond (or a fund of bonds) with a 10% yearly yield in USD? It might straightforwardly pay out 10% interest a year. Assume the USD loses 10% against the CHF in the meantime? Even though you‘ll eventually receive your 10% interest payout, you make a return of -1% (1.1 x 0.9) when calculated in CHF. And then, to make things even worse, you’ll still be on the hook to pay income tax on the 10% income at the applicable exchange rate.

This a pretty straightforward scenario - and one where you might want to currency hedge your investment (though, obviously, if you do not and the USD gained 10% against the CHF, you‘d would receive the 10% interest and then benefit from another 10% gain in the exchange change on top of that).

For equity though, the situation is different. With internationally operating companies, many of the effects of changes in currency rates will even out or considerably smooth out.

(Just to add)

Most probably not by an 1:1 „equal“ amount. In practice, there will certainly be a currency effect and risk. Though that would be very complex if not impossible to accurately predict. „How local or international are companies? What costs are in domestic currency, what are in foreign currency, how do changes in exchange rates affect sales in different markets?“, etc. etc… Over the long term, it‘s probably not worth to worry too much about (especially with regards to globally diversified equity funds investing in developed economies).

#5

Thank you very much for taking the time to explain this :+1:t2:

Maybe also good practice to keep eye on the rates each quarter. History is interesting- gbp/chf swings a fair bit if you view 10yrs data and select monthly view up to 22% . .

1.13 lowest, 1.81 highest

#6

Same with any other international investment, including buying Vanguard ETFs on IB, which are in USD…