Strong pound harms investment returns

Investors in overseas investment funds have seen their returns harmed by a strong pound, according to figures from Interactive Investor.

The financial website’s research found that investors in an American fund would have lost over 5 per cent, despite a 9.3 per cent market return year-to-date. This is because of an increase in the strength of the pound against the US dollar.

“Sterling has benefited from more positive market sentiment and a return of risk taking. The dollar, which is typically seen as the safe-haven currency, has fallen as US investors invest a larger proportion of their cash holdings overseas.” said Rebecca O’Keeffe, head of investment at Interactive investor.

The research also revealed that a sterling fund based on the Nikkei would have returned, on average, minus 3.2 per cent despite the index being up to 16.9 per cent year-to-date.

“While in the past asset allocation and market timing have always been the focus attention for investments, the recent volatility of currency markets has become an increasingly important factor for investors to consider,” says O’Keeffe.

European investment has also suffered, with equity returns of 9.4 per cent turned into minus 3 per cent as a result of currency moves against the Euro. The Nasdaq return of 20 per cent in 2009 would actually be less than 9 per cent for a sterling investor, the research found.

“Investors would sacrifice the interest differential between sterling and the domestic currency of the index,” says O’Keeffe. “If sterling were to fall, as it did for much of last year, then investors who are unhedged will receive a double benefit if equity markets rise.”

It is not enough to simply be concerned about what the equity market point is but investors should be aware of sterling and its possible currency moves, warned O’Keeffe.