International mutual funds have slumped along with global stock markets, and a stronger dollar has also crimped their benefits.
International mutual funds have slumped along with global stock markets, and a stronger dollar has also crimped their benefits. “Currency is no longer a powerful tail wind for U.S. investors,” says Alec Young, international equities strategist with Standard & Poor’s.
A weak dollar in past years gave U.S. investors in international funds a gift as strong local currency gains stretched further in dollars.
The dollar’s long-term downward spiral shifted gears this summer, as global growth concerns began to weigh on foreign currencies. The U.S. Dollar Index, which tracks a basket of currencies versus the greenback, is up about 15 percent since the end of July.
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Most international fund managers don’t hedge against currency fluctuations, says Gregg Wolper, senior fund analyst with Morningstar. International funds are appealing as they help diversify portfolios, and that’s partly through exposure to other currencies, he says. “Most foreign funds like to focus on their stock picking,” he says, noting currency movements are notoriously difficult to predict.
Funds that do hedge can do so through derivatives or by simply holding cash, says Chad Deakins, lead portfolio manager of RidgeWorth International Equity Fund (STITX).
He says the dollar’s recent rise was partly due to the Federal Reserve’s five-month pause in interest-rate cuts. But after the Fed and global central banks slashed rates Wednesday, he says the dollar’s short-term direction is unclear, as lower rates can undermine a currency.
In the long term, Deakins says the effects of currency fluctuations cancel out. He notes a stronger dollar also affects mutual funds that invest in large-cap U.S. stocks.
These companies tend to derive big portions of their revenue overseas and have enjoyed conversion boosts from the weak dollar. But as these favorable effects wear off, earnings and stock prices could suffer, Deakins says.