26/06/2025
WHEN CHOOSING A FUND WITH EXPOSURE TO ANOTHER CURRENCY, HOW DOES THE SHARE CLASS CHOOSE AFFECT THE VALUATION OF OUR PORTFOLIO?
In the world of investment funds, one must tread carefully when looking at the profitability of a fund or a SICAV, since there are more factors than it seems that affect the profitability reported by the fund or even the profitability of the fund in our portfolio.
The clearest factors are: commissions, whether the class is accumulation or distribution, and the currency; today we're going to see how the latter affects us.
CURRENCY DIFFERENCES
Let's take the Pictet-USD Government Bonds fund as an example. This fund invests 100% in dollar-denominated fixed-income assets. When analyzing it as euro investors, we must keep in mind that currency management can significantly affect the returns we receive. If we examine three identical share classes, all accumulation-based and with the same fees, but one in dollars, another in euros, and another in euros hedged, we see that the returns of the same fund vary considerably.
The dollar and euro hedged share classes are similar because hedging has been very costly this past year, at 2%, due to the interest rate differential. On the other hand, we have the euro unhedged share class, where currency volatility has been a determining factor. At first glance, it might seem that the best option would have been to invest in dollars, where we would have obtained 4% compared to the 2% of the euro hedged share class or the -4% of the euro unhedged share class. However, as euro investors, what we would have received would have been the following:
When converting the currency to Euros, we see that the perceived return would be equivalent to that of the class in Euros; in short, it is equivalent to buying the fund with the net asset value converted to Euros or Dollars and valuing it in Euros, even though the return figure we see from the fund is very different.
