As investors seek greater global exposure, advisors must be aware of the impact of currency fluctuations on the underlying investment as well as the overall health of the client’s portfolio.
Perhaps only ultra-wealthy clients will soon buy coffee in Zurich and feel stunned by the $9 price tag, but that doesn’t mean advisors shouldn’t think about helping protect their clients’ global purchasing power, says Matthias Kuhlmey, head of Group Investment Solutions for HighTower and formerly with Deutsche Bank in Europe.
Having worked in both Europe and the U.S., Kuhlmey notices a difference in European and American perceptions of currency that could have a negative effect on a clients’ portfolio.
It’s a generalization, Kuhlmey says, but when Europeans are asked about the value of their currency they tend to answer with a fractional value. Americans on the other hand tend to say, ‘A dollar is a dollar.’ “If you don’t consider that there is more than your base currency, you could lose out on purchasing power,” he says.
This is true even if advisors are not investing clients directly in currencies, experts say. If clients are invested in foreign companies through American Depositary Receipts (ADR’s) listed in the U.S., it’s still important to consider the role of currency. “Most clients, and even advisors, think they don’t have a currency risk or opportunity,” Kuhlmey says.
Consider an investment in Toyota through an ADR as an example. Though the investment is in the U.S. dollar, the business is based in Japan and has exposure to fluctuations in the currency and wider economy, says Jack McIntyre, a portfolio manager with Brandywine Global Investment Management. “It’s one global marketplace now,” says McIntyre. “That means you’ve got to take into account currency analysis.”
Kuhlmey also urges advisors take a closer look at the impact global investments have on a clients’ overall wealth. “It’s very important to understand the currency risk and the opportunity separate from the underlying investment and often we don’t make that extra step,” he says. “It’s an immensely important consideration to preserve wealth.”
This is especially true in light of the U.S. dollar’s trajectory in recent years. “The real, trade-weighted dollar is near multi-year lows,” Kuhlmey says. “Americans by definition have lost global purchasing power over the last 10-plus years.”
“Currency plays a big role in your total return,” says Mark Senseman, an investment specialist with Strategic Wealth Associates. Right now U.S. investors have an advantage when investing in things like global REITs or bonds denominated in the host country because of potentially higher yields than in the U.S. Then when we convert back to U.S. dollars, total return can be enhanced, Senseman says.
Though protecting clients’ global buying power isn’t a huge concern, Senseman says it is a part of the equation. “It’s an overall concern that you need to consider when investing internationally.”