FX exposure in global (or regional) trusts


#1

Hi - does anyone know if investment trusts in general hedge their assets back into GBP or not? This obviously has a big impact on those trusts with significant overseas investments in terms of their total returns in GBP for UK investors.


#2

@apatel, You need to check the annual reports of the respective ITs because there can be variations. Search for Currency Risk, or the less-specific Currency which can return additional information on the current state for those that do.

A few examples:

Murray International:

It is not the Company’s policy to hedge this [currency] risk on a continuing basis but the Company may, from time to time, match specific overseas investment with foreign currency borrowings.

Scottish American:

Forward currency contracts are used periodically to limit the Company’s exposure to anticipated future changes in exchange rates which might otherwise adversely affect the value of the portfolio of investments

Henderson European Focus:

The majority of the Company’s assets are denominated in currencies other than sterling so the Company’s total return and Balance Sheet can be significantly affected by currency fluctuations. No hedging of the currency exposure is undertaken.

Aberdeen Japan:

… the Company seeks to ensure that the Company’s Yen net exposure is appropriately Sterling–hedged through the use of rolling forward currency contracts.

Searching AJIT’s report just for Currency will lead to the following: As has been noted previously, the currency hedge, which was about 46% of NAV at the year end, manages currency related risk, and in so doing will periodically produce either gains or losses, as was the case this year

What you may also find is that hedging might be done in the form of borrowing in a currency in order to buy assets denominated in that currency - MYI being an example. And whilst the IT’s assets themselves might not necessarily be hedged, the IT’s borrowings may well be if they are to be used to buy assets denominated in a different currency - again, MYI.

The problem here might be with those ITs that are flexible over whether they hedge: the situation might be different now, or in the future, compared to the snapshot of the annual report. The latest relevant factsheet may give an update to this situation, but no guarantees on this.