One question I have been receiving regularly is whether investors should hedge currencies in their portfolio. This question has become increasingly important since Brexit as the value of the Pound has seemed to gyrate heavily over the past two years.
The simple answer as to whether I hedge currencies is No.
If I were to hedge currencies in my portfolio, a question I would ask myself is how would I do so? Should I base it on the currency of the country in which the companies are listed? This obviously would not work. There may be no connection between the country in which a company is listed and its area of operations. The same is true of its country of incorporation or headquarters. Nestle is a very good example of this. Although it is headquartered in Switzerland, has its main listing there and reports in Swiss francs, it has only about 2% of its revenues in Switzerland, so hedging my Nestle holdings by selling Swiss francs forward against sterling would surely not be a hedge at all. It is also far from unknown for companies to report in a different currency to that of the country in which they are headquartered or listed.
A lot of FTSE 100 companies have very little business in the UK. Companies like Hikma, BHP Billiton, Antofagasta and Standard Chartered hardly derive any revenues in the UK. But they are all listed here and headquarters here with the exception of Hikma and BHP. Hedging currencies would be a very tough ask especially when you have numerous stocks in your portfolio.
Perhaps I should hedge currencies based upon the country in which the companies I own has its revenues? The problem with this approach is twofold. Firstly, most of the companies I own shares in supply low value items and so manufacture and sell locally or at least regionally. No one exports significant amounts of bulky low value items such as drinks, detergent or deodorants. So the exposure, if there is any, relates only to the profit margin. Secondly, the finance department within the company may already have taken out a currency hedge for the translation and/or transmission of those profits so that any currency hedge by me would in fact be creating an exposure.
There you have it. I believe that individual investors should not waste their time (and money) obtaining currency hedges for their portfolio. Instead, the time should be used to research shares in quality companies. Quality companies are resilient and well diversified across many geographies and this will ensure any one currency will not derail the performance of the company.