Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
WITH the UK economy having surprised to the upside in January and interest rates set on an upward path, you might have expected the pound to have strengthened over the past month.
Instead it’s done the opposite, falling back against both the US dollar and the euro. This apparent anomaly can be largely explained by the war in Ukraine, which has forced investors into “safe haven” currencies. Against the dollar, the pound is now at its lowest level since November 20201.
For the UK economy, sterling weakness could not have come at a worse time. While there are a myriad of effects arising from a weak currency – some of them positive, some decidedly not – the overwhelmingly important one in the UK is the effect on consumers.
We’ve explored in some detail over the past couple of months the effects of rising food and energy prices, because both are about to reshape the near-term financial futures of many households, whose wages are failing to keep up.
Petrol price rises are particularly worrying and they’ve been accentuated by a weak pound. The last time the dollar cost of oil was as high as it is today was in 2008, when the pound – currently worth around $1.30 – was briefly above $2. Back then, a pound would have bought about 50% more oil².
From an investing standpoint, sterling weakness underlines the importance of maintaining an exposure to overseas markets and currencies in order to smooth and maximise returns. Unless you want to see the value of your portfolio bounce around with changes in the pound, diversification is the answer.
Most funds investing overseas are unhedged against currency movements. There are notable exceptions. For example, sterling bond funds, which a large number of investors rely on to generate a stable, regular income, are often hedged back into pounds.
Most of the time though, diversification is the key. Currencies move around against each other over time in a largely unpredictable way that is costly to insure (hedge) against, so the best an investor can normally do is spread their investments across many of them.
The Fidelity Select 50 Balanced Fund, for example, provides a broad exposure to markets and currencies all in one place. This fund invests in 30 or so other funds, mostly taken from Fidelity’s Select 50 list of favourite funds. Alongside a 33% weighting in the UK, this fund currently has large positions in Europe (22%) the US (28%) Asia (6%) Japan (7%) and smaller holdings in Australasia, Canada and Africa.
You can find out more about how the fund is managed in the video below.
1 Bloomberg, 15.03.22
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. Tax treatment depends on individual circumstances and all tax rules may change in the future. Select 50 is not a personal recommendation to buy or sell a fund. Fidelity Select 50 Balanced Fund investment policy means it invests mainly in units in collective investment schemes. There are just a few fixed limits for the three core elements in the fund. These are 30% to 70% for shares, 20% to 60% for bonds and 0% to 20% for cash. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.
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