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Canadians are encouraged to diversify their investments outside the country but may not give enough consideration to how currency differences can affect their portfolios.

“Currency returns are an important factor affecting any investor purchasing a non-Canadian asset,” states a recent BMO Global Asset Management (BMO GAM) report, noting assets bought in a foreign currency can either add or detract from the total return depending on how they trade against the Canadian dollar.

While there’s purchasing power parity (PPP) between two currencies, the report notes that currencies can trade beyond their PPP for extended periods of time – and some people prefer shorter investment timelines.

Currency hedging can help reduce the impact of foreign exchange movements in the short term, says Mark Raes, managing director and head of products at BMO GAM in Toronto and author of the firm’s currency report.

“It’s important to have not just a view on markets but on currency,” says Mr. Raes, whose organization provides hedged and unhedged exchange-traded funds (ETFs).

Globe Advisor spoke recently with Mr. Raes about how currencies can play a role in investment planning, specifically the relationship between the Canadian and U.S. dollars.

What’s your forecast for the currency markets in the months ahead?

We’re clearly in a risk-off environment [in which equities sell off and investors seek safer assets], which typically means strength in the U.S. dollar.

For some investors, it may be an opportunity to pick up extra returns for their portfolios by using different currency strategies, such as moving between hedged and unhedged ETFs, depending on their view of the currency.

How can investors play currency movements?

It depends on how comfortable they are in making a currency call. Consider 2022, during which the Canadian dollar fell 8 per cent against the U.S. dollar. That was a potential opportunity for shorter-term investors.

A common institutional approach is to use a blended application, typically 50 per cent hedged, 50 per cent unhedged. Some portfolio managers may take a more active approach based on moves in the currency, while others may remain 100 per cent unhedged.

What are some key considerations with currency investments?

As with any decision, the investment time horizon is a critical consideration. For example, if you’re thinking more short term, you may want to be more active between a hedged and unhedged [product].

If you’re thinking more long-term, you may be less focused on currency and more focused on consistent portfolio construction.

The correlation between investments and currency is also key and may affect the decision. Some currencies, such as the U.S. dollar, tend to be correlated negatively with equity markets, which can provide an additional source of diversification for investors. An unhedged position can potentially reduce the volatility of an investor’s portfolio.

Another consideration is the cost. ETFs are seen as a more accessible and cost-effective way to invest in currency moves. With a single-ticket investment, you’re getting either an unhedged or hedged exposure to whatever marketplace you’re after, which is much easier than dealing with currency hedging yourself.

This interview has been edited and condensed.

- Brenda Bouw, Globe Advisor Reporter

Must-reads from Globe Advisor this week

Why market predictions fail and how to prevent falling for them

It’s that time of the year when pundits are out in full force with their predictions for the year ahead. But how much attention do they deserve? As the events of 2022 reminded us, the world is a big, complicated place with lots of moving parts. Who expected the rout in technology stocks? Who saw the return of inflation? Did anyone anticipate Russia’s invasion of Ukraine to endure so long? Given how unreliable expert predictions are, Felix Narhi of PenderFund Capital Management looks at why we pay attention to them.

Is shifting retirement investments into safe havens a good idea?

Equity market volatility tends to send investors fleeing for fixed income. But with stocks and bonds suffering in tandem this past year, advisors say clients are beginning to ask about long-maligned guaranteed investment certificates, which have become an appealing proposition as interest rates have risen. The frustration for clients is that fixed income, which is supposed to be a stable part of their portfolio, has shown price movement. Kelsey Rolfe reports on how advisors are handling clients’ desire for safety and whether they’re using other approaches to preserve capital for retirement.

How to prevent COMO – comfort of missing out – in financial markets this year

It’s not every year that Canadian stocks, bonds, and cash, net of inflation, all produce negative returns, as was the case in 2022. In fact, when looking back at the data, it’s the first time this combination has happened since 1980. So, as is the case with anything that doesn’t occur often, people tend to overreact when it does. The challenge for advisors is investors like to make decisions in a binary manner, either going ‘’all in’' – driven by the fear of missing out (FOMO) – or ‘’all out’' – driven by the comfort of missing out (COMO). Jonathan Durocher of National Bank Financial Wealth Management gives insight on what to do when investors are tempted by the COMO mindset.

Why money managers are so divided on the 60-40 portfolio

The drubbing in both stocks and bonds last year has rekindled the debate over the merits of the balanced 60-40 stock-and-bond portfolio. While some forecast the slow death of the traditional asset mix, pointing out it’s not diversified enough, others argue one bad year shouldn’t upend the longstanding investing rule of thumb, as long as it’s used in the right circumstances. Brenda Bouw speaks to portfolio managers to find out which side of the ongoing debate they fall on and how they’re allocating assets in this environment.

Also see:

Focus for Mackenzie’s new CEO is on ‘winning’ retail investment, partnerships, distribution

Why this money manager is taking profits from private equity to deploy in public markets

Selling or transferring a business for top dollar takes time and careful planning

The price-to-fantasy ratio that beguiles investors

Fund managers slash bets on U.S. stocks as they seek returns in Europe, emerging markets

What you and your clients need to know

Seven Canadian equity funds with positive returns in a tough year

Ian Tam of Morningstar Canada looks at Canadian equity funds that were able to use these higher profits to boost returns for investors. He uses Morningstar Direct to screen exchange-traded funds (ETFs) and do-it-yourself mutual funds that have squeezed out positive returns over 2022 and have also shown reasonable after-fee, risk-adjusted returns over a longer time frame. Here’s a list of equity ETFs that took advantage of growing corporate earnings.

Cash and other rental incentives dwindle in a highly competitive housing market

Real estate analysts say incentives meant to woo renters to expensive homes have become less common in recent months and that the trend is a symptom of heavily competitive housing markets in cities such as Toronto and Vancouver. Landlords were coming up with creative ways to fill vacant apartments during the early days of the pandemic, such as free months of rent, cable subscriptions or even extravagant offers including skydiving tickets. But those deals are drying up as the rental landscape becomes competitive because of rising interest rates are pushing would-be homeowners to the rental market, and as some people return to cities now that the worst of the pandemic is over. Salmaan Farooqui reports on the market dynamics.

Are you selfish enough to be productive?

Consultant and former New York Times columnist Adam Bryant argues every moment of your day falls into one of three categories: want, should or need. You essentially are making decisions on how to use each moment based, implicitly or explicitly, on completing an intention that begins “I want to …,” “I should …,” or “I need to ….” (A close cousin to the last one is: “I have to ….”) If you accept those buckets, he suggests you can use them to better organize your life. Harvey Schachter looks at how to figure out whether your life has an acceptable want-should-need balance.

– Globe Advisor Staff