International International Shares - Hedged vs Unhedged?

Hey @ Another Brew!

50% offshore is 50% Australian which is a huge over weighting towards Australia compared to market capitalisation.

Currency in which most of what you consume is produced should probably also come into the equation I think.

I’m not sure 50% max offshore is a good rule of thumb. I got to 50/50 because I could safely say 100% home currency was not optimum. 100% offshore was not optimum. I don’t know enough to fine tune optimum. I couldn’t say 40/60 is better than 30/70 or 50/50. Having to decide with less than perfect knowledge I split the difference to come up with 50/50. Staying the course on that allocation will probably be more important than fart arsing around to fine tune for optimum anyway.

I wouldn’t go as far as to say 50% max is a good rule of thumb for everybody.

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I see four stages of investment – and they aint necessarily age or retirement related.

Accumulation: Where the savings you put in dwarf returns and drawings
Compounding: Where the return you make dwarfs, savings put in and drawings taken out.
Neutral: Where the drawings taken out neutralise the savings put in and the return made.
Drawdown: Where the drawings dwarf the savings put in and the return made.

Each of the four stages have graduations before they morph into the next stage.

If you are in the draw down stage or even the neutral stage that could be tipped into a draw down stage with untimely returns, you face significant sequence of return risk. You had better think of hedging in “short term volatility terms” and you may need to hedge 100% and take long term home country risk over short term currency volatility risk depending on your capital adequacy to expense requirement ratio.

If you are comfortably in the accumulation or compounding stage – you actually want short term volatility to enhance your long-term return, so hedging is an unnecessary expense, potentially unnecessary volatility damper. Plus you don't want to be undermining the diversification benefits of offshore exposure.

I have sardine (well smoked salmon) tastes on a caviar budget so retirement for me does not mean leaving the compounding stage of investment hence I expect to always have my global diversification completely unhedged. Others will have different circumstances and need to think about hedging differently.

 

I sometimes wonder why single-country risk is noted for home country bias but not considered an issue for a fully "diversified" global caps portfolio where half of it is the US.

Part of me would like to reduce single country risk by going with a global portfolio of maybe 40:60 but then I figure, firstly that the US is an economy built upon capitalism (unlike much of much of Europe which leans a lot more to socialism), and the US is already an economic powerhouse with momentum which is unlikely to just stop in its tracks within a short period (it took a long time for it to grow to being half of the market cap of the world), and I figure I can't know more than the market. Still a concern though, but no idea how to deal with that issue.

 

I'm on board with you on this one. I probably wasn't clear. When I said "Max 50% offshore unhedged sounds like a good rule of thumb." I meant out of these 3 components, the last one to be a max of 50%, and with the first 2 splitting in a way that you felt was not overweighting the Au market beyond what you were comfortable with.
Au
Int'l hedged
Int'l unhedged

Nice way to separate the 4 stages. So essentially, hedging would increase as you moved down the spectrum, where up until a point 0% makes sense and beyond a certain point 100% makes sense.

I do wonder sometimes, how many FP's have even the slightest clue about some of these less discussed but so very crucial concepts. It would be so easy to miss one of these points and the result would be catastrophic.

 

These white papers from vanguard might be helpful in deciding on international allocation and dealing with home country bias and hedging etc:

https://static.vgcontent.info/crp/i...ersified-funds-whitepaper.pdf?20180918|094522

https://www.vanguardcanada.ca/documents/home-bias-allocation.pdf

 

Well unlike these other heuristic based amateurs, I have applied an exacting scientific method....and the result is 52.5% AUD / 47.5% Unhedged. The scientific method was based on a combination of vibe and what I could feel in my waters.

 

Yeah I remember that paper. I just don't see how they came up with the numbers for starting at 25% and each amount of movement in each direction after that. It looks like they just plucked numbers out of the air (?)

 

So if we look at S&P500, Sales outside of US are c.45%. ASX300 is around 30% from memory.
The issue with Europe is a lot of stuff isn't investable, being in Private hands. Look at the German market for example, it is very small in relation to its economy. So, overweighting smaller Euro markets presents increased concentration risk due to the limited size of those markets. Where I've come to is to just hold Intl. Dev. per market cap.

 

I think you are infringing on my patented SWAG methodology .




[Scientific Wild Arse Guessing]

 

@dunno:

Excellent post.

“depending on your capital adequacy to expense requirement ratio.”

Such an important point. As retirees we’re generously covered in relation to this so we’re comfortable continuing to have a high allocation to equities and remaining unhedged with international equities throughout our entire retirement. We are holding more cash at this point in time due to being in the higher SOR zone. But even then it’s no more than around 15%. Over time I expect equities will likely continue to grow thus reducing our cash holding allocation “percentage”.

As for bonds given Australia’s Credit rating I have no interest in investing globally. If we did they would be fully hedged. We sleep well with local Cash / term Deposits. However I have a note in our Investment Policy Document that if Australia’s Credit rating deteriorates noticeably other alternatives may have to be considered. Historically Australia hasn’t fared too badly though when the sh*t hits the fan.

As @dunno stated I don’t think it can be said that unhedged international equities are suitable for all based on the wash principle etc. It very much depends on each investors specific circumstances.

 

Beauty thanks for that. For a moment I thought I might have been developing a prostate problem.

 

50/50 is where the smart money is as you can't be more than 50% from the correct answer.

 

At least you can always say “well I was half right”

 

Nothing new but it might be of use to someone. It’s the view we take in that we are unhedged global equities even as retirees who as a group are potentially more likely to worry about currency movements:

To hedge or not to hedge? That is the question.

What isn’t covered is listed property and infrastructure where opinions may vary more widely.

 

Further to this excellent video interviewing Hamish Douglas posted elsewhere on PC there’s an earlier interview / transcript from 2016 providing detail on how Douglas personally invests long term between hedged vs unhedged International equities:



A permanent state of distorted reality

 

And my rough transcript of the recent interview (currency section only) with Hamish Douglas. One of the better simple / brief educational pieces you will likely find on dealing with currency impact on global equities. But basically the same as in the Morningstar interview:

 

Good explanation by Douglass @Nodrog

 

I thought so. But what really surprised me is that here is a guy who knows more about international investing than most on the planet yet his approach to personal investing in regard to hedging is so god damn simple.

I don’t think many here more focused on which LIC / ETF to buy etc realise the value of this short snippet from Douglass.

 

International Shares - Wealth Foundations

 

Hi @Nodrog

Thanks for the posts on the hedging decision

I'm guessing the dilema for you is short term volatility in the SOR window vs long term deep country risk mitigation.

Interested to hear where your thoughts are at the moment?

 

Off to the pub shortly for dinner so will respond more later.

To be honest I’ve been reading researching like crazy on this topic over the last week to two. Like to challenge my thinking as I’m an obsessive type who can sometimes get locked into all or nothing type thinking including my views on investing at times.

I think for those in nearing retirement or drawing on their savings and depending on their wealth it’s not necessarily an easy decision when it comes to hedged vs unhedged.

The usual “in the long term” is used to validate an approach but each Investors timeframe can vary.

Meal / beer time. Back later.