Confused on Currency exchange

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Chinabased
Posts: 16
Joined: Thu Sep 18, 2014 9:26 am

Confused on Currency exchange

Post by Chinabased » Tue Oct 23, 2018 9:20 am

Hi all

I am an Australian expat living in HK.

I am earning USD and i invest with Saxo quarterly on the below portfolio. Not sure where me and my wife will retire but not sure it will be Australia. Makes choosing the portfolio difficult.

I have a USD account, not multi currency so i usually divided my quarterly payments in USD and then for the AUD convert to that currency when i buy the units.

30% Vanguard S and P 500 UCITS ETF (VUSD)...bought on the UK exchange (USD denominated)
30% All World ex USD (VEU)...bought on Australian exchange (AUD denominated)
40% Ishares Inflation Linked Govt Bonds (IGIL) bought on UK exchange (USD denominated)

I have been reading Andrew Hallams blog. Am a big fan of his and read both of his books.

https://andrewhallam.com/2016/05/expatr ... listed-in/

Based on the above he says that you do not need to worry about the underlying currency the fund is in. I just dont get it. I have invested 16 times over the last 1.5 years and Saxo is telling me my profit is AUD416 but for USD profit which my account is in its -8902USD.

Since all conversion once i sell goes back into USD it does seem like something i should worry about.

Can anyone please let me know what i am not seeing in all this?

Thanks for the help.

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JoMoney
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Joined: Tue Jul 23, 2013 5:31 am

Re: Confused on Currency exchange

Post by JoMoney » Tue Oct 23, 2018 5:46 pm

As far as equity goes, you will own the same amount of the company regardless of what currency it's denominated in. At any particular time, you could theoretically choose to transfer the shares to an account denominated in some other currency and it would likely represent the same % of ownership of the same company regardless of what the differences in currency exchange rates are.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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whodidntante
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Re: Confused on Currency exchange

Post by whodidntante » Tue Oct 23, 2018 6:07 pm

Chinabased wrote:
Tue Oct 23, 2018 9:20 am
I have invested 16 times over the last 1.5 years and Saxo is telling me my profit is AUD416 but for USD profit which my account is in its -8902USD.
This just means that AUD fell in relation to USD.

If you want to hold American stocks but don't want exposure to the American dollar, you can use futures contracts to hedge currencies. You can also do this for other major constituent currencies for ex-USA stocks. But I don't recommend it and I don't hedge currencies myself. Hedge in this context means "to cancel" i.e. to nullify exposure in a long position by taking an offsetting short position.

mbres60
Posts: 850
Joined: Tue Jul 03, 2007 1:47 pm

Re: Confused on Currency exchange

Post by mbres60 » Tue Oct 23, 2018 6:35 pm

I just went to a currency converter and US $8902 = $12,561 AUD so I don't understand why your profit is $416 AUD.

typical.investor
Posts: 346
Joined: Mon Jun 11, 2018 3:17 am

Re: Confused on Currency exchange

Post by typical.investor » Tue Oct 23, 2018 6:59 pm

Chinabased wrote:
Tue Oct 23, 2018 9:20 am

Based on the above he says that you do not need to worry about the underlying currency the fund is in. I just dont get it. I have invested 16 times over the last 1.5 years and Saxo is telling me my profit is AUD416 but for USD profit which my account is in its -8902USD.
If you are going to measure in AUD (say for understanding how much you have if retiring in Australia), you need to consider the underlying holdings. It doesn't look like you have much in the way of AUD exposure. VEU is only about 5%. Not sure about IGIL but I suspect USD is the lion's share and AUD is pretty small.

So if AUD strengthens, your returns will be better, and vice versa which is what you are seeing now.

I'm not sure what an Australian investor typically does, but I might look into ILB (Australian inflation-linked fixed income securities). Not sure if you chose IGIL for higher yield or diversification of credit risk or just simplicity to holding it to one fund.

Or maybe in downturns you expect the AUD to fall as commodities aren't in demand and people move to safe assets/currencies.

In any case, fund denomination doesn't matter. Your underlying holding do and as you have seen, the AUD value will differ.

jjface
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Joined: Thu Mar 19, 2015 6:18 pm

Re: Confused on Currency exchange

Post by jjface » Tue Oct 23, 2018 7:20 pm

What he is saying is that the same ETF could be listed in different currencies but the actual fund itself - the underlying assets is what matters. So lets say you take a AUS dollar denominated S&P 500 fund and a regular US denominated S&P 500 fund.

Say the AUS : USD exchange is 2:1 for simplicity. So you buy $200 AUS of the first fund and $100 USD of the second fund. Both are worth the same $100 US dollars.

Now the S&P 500 doubles but the AUS-US exchange moves to 1:1. The first fund will still be worth $200 AUS dollars and the second will double to $200 USD. So you may think hey the second fund has done better. But in reality both are worth $200 USD. They have the same underlying assets. They are both a S&P 500 fund.

If the currency you want to own and spend is the AUS dollar then you are subject to exchange losses here when investing in underlying US assets. Because the exchange rate moved from 2:1 to 1:1. If the exchange rate had stayed the same your fund would have been worth $400 AUS dollars but now it is worth $200 AUS dollars. So you have an exchange loss of $200 AUS dollars. The currency does matter because the underlying asset currency is different to your currency.

But if the currency you want is USD then you do not have to worry. Your S&P fund invests in US dollars assets whether you buy the AUS dollar version or the US dollar version -so you have no exposure to exchange rate movements. Both the AUS dollar S&P 500 fund and the US fund are both worth $200 US dollars. You can own either and it will not matter.

alex_686
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Re: Confused on Currency exchange

Post by alex_686 » Tue Oct 23, 2018 7:52 pm

Inflation adjusted currency risk for equities historically has a 1% standard deviation.

Most FX risk is tied to inflation. Real assets, what underpins most equities, tends to be a good hedge against inflation, and hence FX risk.

Chinabased
Posts: 16
Joined: Thu Sep 18, 2014 9:26 am

Re: Confused on Currency exchange

Post by Chinabased » Tue Oct 23, 2018 10:38 pm

Thanks to all of you. really appreciate the replies.

there is really something in my brain not making the connection here.

The main problem is below:
2079 units bought
16 trades my weighted average buy in AUD is 67.706 (140760AUD)
20 minutes ago price for the fund is 68.10 if i sold now i would get (140579.9AUD)
Profit: 180.1AUD

In Saxo it is telling me:
Based on current price if i sell based on average buy price right now the profit is around 400AUD (price fluctuating a lot today so use this for example)
As my account is in USD its telling me my loss USD8578 (-8578USD)

1. This is the part i dont understand. How can the discrepancy between AUD and USD be so much?
2. I have a USD denominated account so its converted to USD on sale so at retirement lets say same situation as now i am basically drawing down on a loss making fund which might be proftable in Australian dollars but loss making once converted back to USD.
3.I am right in thinking as its a all world ex us fund it is investing in a range of currencies that is not USD and once thats converted back to AUD that the AUD is not as strong as the USD currency at the moment and that is explaining the massive paper loss in USD and the slight profit in AUD against that basket of worldwide ex us funds it is being invested in?
4. If correct should i just not worry about it as over 20 years of investing it hopefully will just even out? I am not sure how much home country bias i should be having to Australia as i dont think i will ever live there. Being a nomad could be Australia, Canada or a country in Asia.

Thanks again all. I cant believe how much this is stressing me :)

typical.investor
Posts: 346
Joined: Mon Jun 11, 2018 3:17 am

Re: Confused on Currency exchange

Post by typical.investor » Wed Oct 24, 2018 1:05 am

Chinabased wrote:
Tue Oct 23, 2018 10:38 pm
1. This is the part i dont understand. How can the discrepancy between AUD and USD be so much?
The USD strengthened. So VEU assets don't fetch that much in USD. Same with the 57% of non-US bonds in IGIL.

Those VEU and IGIL do return a nice amount of AUD though.
Chinabased wrote:
Tue Oct 23, 2018 10:38 pm
2. I have a USD denominated account so its converted to USD on sale so at retirement lets say same situation as now i am basically drawing down on a loss making fund which might be proftable in Australian dollars but loss making once converted back to USD.
That's why people who want to spend in USD, try to have more underlying assets in the US. Most US investors would never use IGIL because the USD exposure is only 43% and isn't hedged.
Chinabased wrote:
Tue Oct 23, 2018 10:38 pm
3.I am right in thinking as its a all world ex us fund it is investing in a range of currencies that is not USD and once thats converted back to AUD that the AUD is not as strong as the USD currency at the moment and that is explaining the massive paper loss in USD and the slight profit in AUD against that basket of worldwide ex us funds it is being invested in?
Yes
Chinabased wrote:
Tue Oct 23, 2018 10:38 pm
4. If correct should i just not worry about it as over 20 years of investing it hopefully will just even out? I am not sure how much home country bias i should be having to Australia as i dont think i will ever live there. Being a nomad could be Australia, Canada or a country in Asia.

Thanks again all. I cant believe how much this is stressing me :)
For a nomad, you have a good portfolio. US and International equities are balanced and close to global weights. You hold a basket of inflation linked bonds, so your currency exposure is again global.

Anyone who has been holding unhedged international assets has been suffering as the USD rose. And international investors holding USD exposure have done well. Currencies are cyclical though and once the USD starts to weaken, I bet many will move out of USD exposure. For now though, flows are into USD and who knows for how long.

As a nomad, you have the distinct luxury of being able to pick where you want to retire. Just go someplace with a weak currency and you will have more money (unless you buy a lot of imported things).

Chinabased
Posts: 16
Joined: Thu Sep 18, 2014 9:26 am

Re: Confused on Currency exchange

Post by Chinabased » Wed Oct 24, 2018 6:35 am

Thanks for this really helps!

what do you think about changing it up on the bonds and keeping IGIL but adding between 2 other bond funds:

Australian government bonds (5-10%) i will be travelling and staying for some time there even in old age
Canadian govt bonds most likely we would move to in retirement as wife is canadian (10%-15%)
IGIL keep at 20%

I am wondering about doing this vs keeping in IGIL and when i get close to retirement and decide with the wife we just change the bond fund on that day to the country we will live in?

thanks

typical.investor
Posts: 346
Joined: Mon Jun 11, 2018 3:17 am

Re: Confused on Currency exchange

Post by typical.investor » Wed Oct 24, 2018 7:36 am

Chinabased wrote:
Wed Oct 24, 2018 6:35 am
Thanks for this really helps!

what do you think about changing it up on the bonds and keeping IGIL but adding between 2 other bond funds:

Australian government bonds (5-10%) i will be travelling and staying for some time there even in old age
Canadian govt bonds most likely we would move to in retirement as wife is canadian (10%-15%)
IGIL keep at 20%

I am wondering about doing this vs keeping in IGIL and when i get close to retirement and decide with the wife we just change the bond fund on that day to the country we will live in?
That sounds like a good plan.

As you get closer to retirement, you'll likely increase your bond allocation then. I would start adding those funds as you increase bonds. If you wait until say three years before, it might be in the middle of a cycle. You have lots of time to figure it out.

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