A Global Approach
A t Trivest, we take a global approach to investing in equity markets as part of our diversifica-tion strategy. Volatility in these international investment returns can be exacerbated by currency fluctuations. When investors buy an investment in a country, or ‘union of countries’ (as in Europe), they also are implicitly buying the underlying currency. At the end of an investing year, the investor’s return is equal to that foreign market’s return, plus-or-minus the exchange conversion back into the investor’s home currency. As you can see below, in any given year, the cross-currency exchange movements between two countries can be significant. The yen, in particular, is very volatile.
The following chart shows the last five years’ fluctuations:
Some international ETFs are “hedged” to eliminate the currency impact of international investing. Common holdings in our portfolios that are not affected by swings in the Canadian dollar/US dollar exchange rate are “XSP” (the S&P 500), “XIN” (the EAFE Index), “XSU” (the US Russell 2000 Index) and “CJP” (Japan Nikkei 225).
The shaded returns across the diagonal in the chart below show the calendar 2013 domestic equity returns in the major economies. All of the other entries include the currency impact to these re-turns to show the effective returns for investors who are branching out internationally from their own domestic market. All equity investors fared extremely well in 2013, but less so in Canada vis-a-vis the other regions. Both the US$ and Cdn$ fell against the euro. The yen weakened significantly against all of those other currencies, reducing the huge domestic equity return there for international investors in Japan.
The following chart shows on the right the last five years of simple returns for a Canadian investing around the world. It also shows on the far left column the nine year compound returns (2005-13). The difference between that and the domestic international returns column to its immediate right highlights the nine year geometric currency impact on Canadians investing internationally. You can see that these nine years of currency volatility have flattened out.
Twelve month sectoral results for 2013
One can see in the sector chart below that almost all sectors provided very healthy global returns, except materials. Similarly, all US equity market sectors had the same experience, ex-cept materials also fared well. Energy, telecom and utilities all bounced back from last year. The Canadian whole index was significantly lower than the rest of the world, but it also had strong sectoral results across the board, except in energy, materials and utilities. These three sectors, along with financials, make up a large proportion of the Canadian index and, thus, their under-performance drove the overall Canadian result.