At Trivest, we take a global approach to investing in equity markets as part of our diversification 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.

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).

2014


The following charts show the last five years’ fluctuations:

historicalchange2014

(“+” means a gain for a Canadian)

The shaded returns across the diagonal in the chart below show the calendar 2014 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 well in 2014. The US$ gained significantly against these other currencies to December 31st, and exploded in the first month of 2015 with a further gain of 10% against the loonie. Canadian investors in the US S&P have been rewarded accordingly in the short run, and this year’s Snowbirds have been calling home for more cash.

annualequityindex2014rev

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 ten year compound returns (2005-14). The difference between that and the domestic international returns column to its immediate right highlights the ten year geometric currency impact on Canadians investing internationally. You can see that these ten years of currency volatility have flattened out.

Canadian Investor International Returns 2005-2014

simplereturns2014

Investors have an affinity towards high returns. It makes them feel better, and fortifies their feeling of financial comfort. Investment management isn’t about generating returns .. it is about generating returns relative to risk. Risk-and-return operate asymmetrically…meaning that achieving higher returns probably means that one has taken on more risk, but conversely, taking on more risk does not guarantee higher returns. One of the sub-characteristics of a portfolio is its volatility: how much does it fluctuate in value– in the short run, but more importantly, in the long run. One of the markers for this is the statistical measure called standard deviation. In the following chart, we have calculated the ten year standard deviations from the return data in the Annual Equity Index Returns chart. The numbers on the right represent the standard deviation for each of the geographic domestic markets. The numbers on the left represent the standard deviation for a Canadian investing in those markets, factoring in the currency aspect (far left hand column of that chart).

Standard deviation Canadian investor Domestic
TSX 60 17.78 17.78
S&P 500 14.47 18.09
Euro 350 18.17 21.46
Japan 150 16.39 26.80

Here, we see that the 10 year currency fluctuations acted to reduce the volatility for a Canadian international investor. This analysis can be fine-tuned by creating a mock portfolio where a Canadian investor invests simultaneously across all of these geographic markets (simulating what we actually do). This mock portfolio would have a ten compound return of 7.0% and a standard deviation of 14.7.

Always beware of “lies, damned-lies and statistics”! These analyses are only based upon the ten years that we have been tracking this data. Prudent investing always needs a long term perspective.

2013


The following charts show the last five years’ fluctuations:

historicalchange2013

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.

annualequityindex2013rev

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.

simplereturns2013

2012


The following charts show the last five years’ fluctuations:

The shaded returns across the diagonal in the chart below show the calendar 2012 domestic equity returns in the major economies. All of the other entries add the currency impact to these returns to show the effective returns for investors who are branching out internationally from their own domestic market. All equity investors fared well in 2012, but particularly in the US and European markets. The US$ fell against the loonie and euro. The yen weakened significantly against all of those other currencies, taking a decent domestic equity return and giving losses instead to international investors.

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 eight year compound returns (2005-12). The difference between that and the domestic international returns column to its immediate right highlights the eight year currency impact of Canadians investing internationally.

Article revised: Feb 2015