To what currency should I hedge my fixed income (non-US and non-EU)?

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Topic Author
sublimelaconic
Posts: 32
Joined: Fri Aug 09, 2019 10:02 pm

To what currency should I hedge my fixed income (non-US and non-EU)?

Post by sublimelaconic » Mon Jan 13, 2020 3:16 am

Sorry if this question seems rather basic. Anyway, country is the Philippines. For now (retirement is still very far off), I plan to retire in the Philippines also. I'll be using USD to purchase shares of my chosen ETFs (after converting local currency). Should I choose USD hedged or some other currency to hedge my fixed income? Does it even matter?

Here's my planned portfolio:

80% IWDA iShares Core MSCI World UCITS ETF, TER 0.20%
20% AGGU iShares Core Global Aggregate Bond UCITS ETF, TER 0.10% (USD hedged)

Thanks!

Valuethinker
Posts: 39210
Joined: Fri May 11, 2007 11:07 am

Re: To what currency should I hedge my fixed income (non-US and non-EU)?

Post by Valuethinker » Mon Jan 13, 2020 3:26 am

sublimelaconic wrote:
Mon Jan 13, 2020 3:16 am
Sorry if this question seems rather basic. Anyway, country is the Philippines. For now (retirement is still very far off), I plan to retire in the Philippines also. I'll be using USD to purchase shares of my chosen ETFs (after converting local currency). Should I choose USD hedged or some other currency to hedge my fixed income? Does it even matter?

Here's my planned portfolio:

80% IWDA iShares Core MSCI World UCITS ETF, TER 0.20%
20% AGGU iShares Core Global Aggregate Bond UCITS ETF, TER 0.10% (USD hedged)

Thanks!
My guess is USD is an unofficial currency in Philippines?

You cannot hedge into renimbi, another potential choice.

Thus, USD is the closest proxy to your own currency & the one you are dealing in. So, for stability, I would go with USD.

Topic Author
sublimelaconic
Posts: 32
Joined: Fri Aug 09, 2019 10:02 pm

Re: To what currency should I hedge my fixed income (non-US and non-EU)?

Post by sublimelaconic » Mon Jan 13, 2020 3:39 am

Valuethinker wrote:
Mon Jan 13, 2020 3:26 am
sublimelaconic wrote:
Mon Jan 13, 2020 3:16 am
Sorry if this question seems rather basic. Anyway, country is the Philippines. For now (retirement is still very far off), I plan to retire in the Philippines also. I'll be using USD to purchase shares of my chosen ETFs (after converting local currency). Should I choose USD hedged or some other currency to hedge my fixed income? Does it even matter?

Here's my planned portfolio:

80% IWDA iShares Core MSCI World UCITS ETF, TER 0.20%
20% AGGU iShares Core Global Aggregate Bond UCITS ETF, TER 0.10% (USD hedged)

Thanks!
My guess is USD is an unofficial currency in Philippines?

You cannot hedge into renimbi, another potential choice.

Thus, USD is the closest proxy to your own currency & the one you are dealing in. So, for stability, I would go with USD.
Thank you. Additional questions: The ideal scenario is hedge to your home currency, right? So since I can't hedge to the Philippine Peso, what will be the (negative?) effects on my end?

Valuethinker
Posts: 39210
Joined: Fri May 11, 2007 11:07 am

Re: To what currency should I hedge my fixed income (non-US and non-EU)?

Post by Valuethinker » Mon Jan 13, 2020 5:50 am

sublimelaconic wrote:
Mon Jan 13, 2020 3:39 am
Valuethinker wrote:
Mon Jan 13, 2020 3:26 am
sublimelaconic wrote:
Mon Jan 13, 2020 3:16 am
Sorry if this question seems rather basic. Anyway, country is the Philippines. For now (retirement is still very far off), I plan to retire in the Philippines also. I'll be using USD to purchase shares of my chosen ETFs (after converting local currency). Should I choose USD hedged or some other currency to hedge my fixed income? Does it even matter?

Here's my planned portfolio:

80% IWDA iShares Core MSCI World UCITS ETF, TER 0.20%
20% AGGU iShares Core Global Aggregate Bond UCITS ETF, TER 0.10% (USD hedged)

Thanks!
My guess is USD is an unofficial currency in Philippines?

You cannot hedge into renimbi, another potential choice.

Thus, USD is the closest proxy to your own currency & the one you are dealing in. So, for stability, I would go with USD.
Thank you. Additional questions: The ideal scenario is hedge to your home currency, right? So since I can't hedge to the Philippine Peso, what will be the (negative?) effects on my end?
You are not hedged against domestic inflation.

If Ph. Currency rises against USD you are exposed. On the other hand your cost of living (imports) might also fall.

Topic Author
sublimelaconic
Posts: 32
Joined: Fri Aug 09, 2019 10:02 pm

Re: To what currency should I hedge my fixed income (non-US and non-EU)?

Post by sublimelaconic » Mon Jan 13, 2020 7:07 am

Valuethinker wrote:
Mon Jan 13, 2020 5:50 am
sublimelaconic wrote:
Mon Jan 13, 2020 3:39 am
Valuethinker wrote:
Mon Jan 13, 2020 3:26 am
sublimelaconic wrote:
Mon Jan 13, 2020 3:16 am
Sorry if this question seems rather basic. Anyway, country is the Philippines. For now (retirement is still very far off), I plan to retire in the Philippines also. I'll be using USD to purchase shares of my chosen ETFs (after converting local currency). Should I choose USD hedged or some other currency to hedge my fixed income? Does it even matter?

Here's my planned portfolio:

80% IWDA iShares Core MSCI World UCITS ETF, TER 0.20%
20% AGGU iShares Core Global Aggregate Bond UCITS ETF, TER 0.10% (USD hedged)

Thanks!
My guess is USD is an unofficial currency in Philippines?

You cannot hedge into renimbi, another potential choice.

Thus, USD is the closest proxy to your own currency & the one you are dealing in. So, for stability, I would go with USD.
Thank you. Additional questions: The ideal scenario is hedge to your home currency, right? So since I can't hedge to the Philippine Peso, what will be the (negative?) effects on my end?
You are not hedged against domestic inflation.

If Ph. Currency rises against USD you are exposed. On the other hand your cost of living (imports) might also fall.
Does that mean that if both my bond fund and PH Peso increase by 10%, I gain nothing?

Valuethinker
Posts: 39210
Joined: Fri May 11, 2007 11:07 am

Re: To what currency should I hedge my fixed income (non-US and non-EU)?

Post by Valuethinker » Mon Jan 13, 2020 12:08 pm

sublimelaconic wrote:
Mon Jan 13, 2020 7:07 am
Valuethinker wrote:
Mon Jan 13, 2020 5:50 am
sublimelaconic wrote:
Mon Jan 13, 2020 3:39 am
Valuethinker wrote:
Mon Jan 13, 2020 3:26 am
sublimelaconic wrote:
Mon Jan 13, 2020 3:16 am
Sorry if this question seems rather basic. Anyway, country is the Philippines. For now (retirement is still very far off), I plan to retire in the Philippines also. I'll be using USD to purchase shares of my chosen ETFs (after converting local currency). Should I choose USD hedged or some other currency to hedge my fixed income? Does it even matter?

Here's my planned portfolio:

80% IWDA iShares Core MSCI World UCITS ETF, TER 0.20%
20% AGGU iShares Core Global Aggregate Bond UCITS ETF, TER 0.10% (USD hedged)

Thanks!
My guess is USD is an unofficial currency in Philippines?

You cannot hedge into renimbi, another potential choice.

Thus, USD is the closest proxy to your own currency & the one you are dealing in. So, for stability, I would go with USD.
Thank you. Additional questions: The ideal scenario is hedge to your home currency, right? So since I can't hedge to the Philippine Peso, what will be the (negative?) effects on my end?
You are not hedged against domestic inflation.

If Ph. Currency rises against USD you are exposed. On the other hand your cost of living (imports) might also fall.
Does that mean that if both my bond fund and PH Peso increase by 10%, I gain nothing?
A "hedge" is an investment or financial instrument which offsets the impact of move in the underlying variable.

If PH Peso rises by 10% against say USD then:

- value of all unhedged, non Peso investments falls by 10%. If a bond fund had returned +10% over past year, it has now returned 0%
- however many of the goods that you import might fall by 10% (also foreign travel if you are using USD)

If your investment is currency hedged

- rise of 10% in Peso has no impact on value of the investment (in actual practice, it's never exact, so there will be some fluctuation but it's not possible to know in advance which way)

Conversely, if Peso falls by 10%

- value of your investments (outside Philippines) rises by 10%. Your bond fund has now returned 20% in Peso terms (10% in USD terms, say)
- your cost of living may rise by 10% (probably by less, but anything imported)

My suggestion of hedging to USD was simply:

- desire to have stability in Bond fund values

- otherwise an unhedged bond fund is just a currency play

- my guess is that the most important currency of consumption for someone in Philippines is the USD and that the Peso most closely tracks the USD. That's a guess, and of course "most closely" does not mean necessarily a very close track at all in absolute magnitude terms

- a global government bond fund (investment grade) unhedged would cover the main currencies (EUR, USD, JPY) but would yield close to zero (20% of the bonds are Japanese yielding close to 0%; German government bonds have negative yields, etc)

Topic Author
sublimelaconic
Posts: 32
Joined: Fri Aug 09, 2019 10:02 pm

Re: To what currency should I hedge my fixed income (non-US and non-EU)?

Post by sublimelaconic » Thu Jan 16, 2020 1:11 am

Valuethinker wrote:
Mon Jan 13, 2020 12:08 pm
sublimelaconic wrote:
Mon Jan 13, 2020 7:07 am
Valuethinker wrote:
Mon Jan 13, 2020 5:50 am
sublimelaconic wrote:
Mon Jan 13, 2020 3:39 am
Valuethinker wrote:
Mon Jan 13, 2020 3:26 am


My guess is USD is an unofficial currency in Philippines?

You cannot hedge into renimbi, another potential choice.

Thus, USD is the closest proxy to your own currency & the one you are dealing in. So, for stability, I would go with USD.
Thank you. Additional questions: The ideal scenario is hedge to your home currency, right? So since I can't hedge to the Philippine Peso, what will be the (negative?) effects on my end?
You are not hedged against domestic inflation.

If Ph. Currency rises against USD you are exposed. On the other hand your cost of living (imports) might also fall.
Does that mean that if both my bond fund and PH Peso increase by 10%, I gain nothing?
A "hedge" is an investment or financial instrument which offsets the impact of move in the underlying variable.

If PH Peso rises by 10% against say USD then:

- value of all unhedged, non Peso investments falls by 10%. If a bond fund had returned +10% over past year, it has now returned 0%
- however many of the goods that you import might fall by 10% (also foreign travel if you are using USD)

If your investment is currency hedged

- rise of 10% in Peso has no impact on value of the investment (in actual practice, it's never exact, so there will be some fluctuation but it's not possible to know in advance which way)

Conversely, if Peso falls by 10%

- value of your investments (outside Philippines) rises by 10%. Your bond fund has now returned 20% in Peso terms (10% in USD terms, say)
- your cost of living may rise by 10% (probably by less, but anything imported)

My suggestion of hedging to USD was simply:

- desire to have stability in Bond fund values

- otherwise an unhedged bond fund is just a currency play

- my guess is that the most important currency of consumption for someone in Philippines is the USD and that the Peso most closely tracks the USD. That's a guess, and of course "most closely" does not mean necessarily a very close track at all in absolute magnitude terms

- a global government bond fund (investment grade) unhedged would cover the main currencies (EUR, USD, JPY) but would yield close to zero (20% of the bonds are Japanese yielding close to 0%; German government bonds have negative yields, etc)
So if I understood you correctly: currency hedging reduces the risk (expected or unexpected) of currency fluctuations. The ideal scenario for me is to hedge on the Philippine Peso. But since no global Bond ETF has this option, I have to hedge on USD since this is the currency which is tracked closely by the Philippine Peso.

Additional question: Do I also need to currency hedge the equity portion of my portfolio? Based on my research, this is not necessary, but I was wondering if the same would apply for someone from an emerging market.

Valuethinker
Posts: 39210
Joined: Fri May 11, 2007 11:07 am

Re: To what currency should I hedge my fixed income (non-US and non-EU)?

Post by Valuethinker » Thu Jan 16, 2020 3:59 am

sublimelaconic wrote:
Thu Jan 16, 2020 1:11 am
Valuethinker wrote:
Mon Jan 13, 2020 12:08 pm
sublimelaconic wrote:
Mon Jan 13, 2020 7:07 am
Valuethinker wrote:
Mon Jan 13, 2020 5:50 am
sublimelaconic wrote:
Mon Jan 13, 2020 3:39 am


Thank you. Additional questions: The ideal scenario is hedge to your home currency, right? So since I can't hedge to the Philippine Peso, what will be the (negative?) effects on my end?
You are not hedged against domestic inflation.

If Ph. Currency rises against USD you are exposed. On the other hand your cost of living (imports) might also fall.
Does that mean that if both my bond fund and PH Peso increase by 10%, I gain nothing?
A "hedge" is an investment or financial instrument which offsets the impact of move in the underlying variable.

If PH Peso rises by 10% against say USD then:

- value of all unhedged, non Peso investments falls by 10%. If a bond fund had returned +10% over past year, it has now returned 0%
- however many of the goods that you import might fall by 10% (also foreign travel if you are using USD)

If your investment is currency hedged

- rise of 10% in Peso has no impact on value of the investment (in actual practice, it's never exact, so there will be some fluctuation but it's not possible to know in advance which way)

Conversely, if Peso falls by 10%

- value of your investments (outside Philippines) rises by 10%. Your bond fund has now returned 20% in Peso terms (10% in USD terms, say)
- your cost of living may rise by 10% (probably by less, but anything imported)

My suggestion of hedging to USD was simply:

- desire to have stability in Bond fund values

- otherwise an unhedged bond fund is just a currency play

- my guess is that the most important currency of consumption for someone in Philippines is the USD and that the Peso most closely tracks the USD. That's a guess, and of course "most closely" does not mean necessarily a very close track at all in absolute magnitude terms

- a global government bond fund (investment grade) unhedged would cover the main currencies (EUR, USD, JPY) but would yield close to zero (20% of the bonds are Japanese yielding close to 0%; German government bonds have negative yields, etc)
So if I understood you correctly: currency hedging reduces the risk (expected or unexpected) of currency fluctuations. The ideal scenario for me is to hedge on the Philippine Peso. But since no global Bond ETF has this option, I have to hedge on USD since this is the currency which is tracked closely by the Philippine Peso.

Additional question: Do I also need to currency hedge the equity portion of my portfolio? Based on my research, this is not necessary, but I was wondering if the same would apply for someone from an emerging market.
Andrew9999 who is an Australian living in SE Asia, has some interesting thoughts on this. So to AlohaJoe (American living in Vietnam I believe).

The view we take around here, generally, is that you don't hedge your equity exposure into your home currency. That in the long run currencies correct (in terms of higher inflation leads to more devaluation relative to other currencies) and so currency volatility is not a long run worry in equity investing. Also to some extent stock markets are negatively correlated with inflation - a devaluation leads to a rise in stocks (this is certainly true of UK markets).

In addition if we are still working, we tend to have a lot of assets in our home currency - equity in our homes, our salaries, any state pension rights. The optimal portfolio for those of us not living in the USA is probably at least 30% non-domestic assets (I would suggest 50%, depending where you live).

However as Andrew has pointed out, we don't live in the long run. If you are in Malaysia say, and planning to retire in Australia, an upward valuation of the Australian currency can really hurt. And it is not true that on say a 10 year view, things even out (prices converge in the 2 countries to the extent to offset currency moves).

Currency volatility is something that, as an investor, you should not expect to be rewarded for bearing. Different then from equity returns volatility (you own stocks, take the pain of high volatility, but earn higher long run returns).

You can't really hedge back into Pesos. You could hedge into USD but there is a cost (it should not be very large, less than 0.1% pa?). It's probably better that you simply allow the FX volatility to happen. Only when you are close to retirement (less than 10 years) is this something to focus on and take a decision as to how much uncertainty you can take.

In any case, 60% of the world index, roughly, is US listed stocks - so priced in USD already.

andrew99999
Posts: 556
Joined: Fri Jul 13, 2018 8:14 pm

Re: To what currency should I hedge my fixed income (non-US and non-EU)?

Post by andrew99999 » Thu Jan 16, 2020 4:32 am

For currency risk on the bonds side, this is probably the best article I've read on the topic.
https://monevator.com/what-is-the-minimal-risk-asset/

I'd never use local bonds in a massively corrupt country, so my default would be either US bonds or global bonds unhedged. It still has currency risk but at least no credit risk of it disappearing.

For currency risk on the equity side, it can be useful but I'm sure you don't even have access to PHP-hedged equities anyway,so the point is moot anyway.

It's a bummer that you have to live with currency risk, even on your "safe" assets, but the alternative is worse.

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