Investing 101

To hedge or not to hedge

Ever since the Canadian dollar bottomed out at 61.79 cents US on Jan. 21, 2002, it has been moving steadily higher, hitting a recent high of $1.05 US on April 29, 2011. The loonie’s ascent, which some analysts think could reach $1.10 US or higher, has posed a problem for Canadian investors holding US assets. This is because equities priced in US dollars fall in value when sold and converted into Canadian dollars. It wasn’t that long ago that the opposite was true, with investors earning a nice bonus when they converted their US-dollar-denominated holdings into Canadian dollars.

Currencies can rapidly fluctuate, leaving investors exposed to a loss if they have to sell their shares. To control for currency risks, mutual fund managers often take steps to protect the value of their clients’ foreign investments through a practice called currency hedging.

For example, when investing in the US and many other countries around the world, Mackenzie Cundill portfolio managers smooth out currency volatility by hedging their investments using a variety of financial instruments, including forward contracts that specify a future exchange rate.

Still, Lawrence Chin, Co-Team Lead at Mackenzie Cundill Investments, says hedging will become trickier as the Canadian dollar trends higher. And, at some point, he will have to decide whether it’s more likely that it will continue its ascent or retreat back to par or below its US counterpart.

 “If the Canadian dollar continues to rise, for example, to $1.15 US, the discussion would be, ‘Is it more likely to go up to $1.30 US or down to $1.00?’” says Chin. “At that point, depending on what all the news is, we would probably say it’s more likely to go to $1.00 US and we might not hedge at that point.”

In the end, the Cundill team approaches currency from the perspective of risk management for their Canadian investors. “Hedging the US dollar has been a very good exercise for Cundill investors over the last 10 years,” says Chin. “And right now, we will continue to debate the merits of remaining hedged.”

To determine if you should hedge your investments against currency volatility please consult your financial advisor. To learn more about the current currency hedging practices of Mackenzie funds, go to www.mackenziefinancial.com/currency.