Can fluctuations in currency exchange rates affect the value of your international portfolio?

June 30, 2011

Although conventional wisdom posits that currency returns even out on foreign securities investments over the long term, the valuation of your investment—measured in Canadian dollars—can take a hit when the loonie goes on a steroid binge.

You could stick close to home with your investments, of course, but geographic diversification of your portfolio is essential if you want to reduce risk and optimize return. The trouble is, currency exposure is inherent in foreign investment. Can you afford to ignore it?

Simply put, currencies—like all other investment decisions—must be actively managed.

"MD Physician Services is one of the first to recognize and act on that reality," says Craig Maddock, Vice President, Investment Management. "Since the beginning of the year, MD's Investment Management and Strategy team has been adding a second layer of fund management, employing a global currency manager to attempt to enhance returns and reduce the volatility associated with foreign investment. In selecting a manager—CIBC Global Asset Management—we applied the same rigorous proprietary investment management process we've used for the selection of all of our fund managers."

Since the introduction of currency management, the result has been improved management and enhanced returns—both at no extra cost to MD clients.

MD's approach is to manage currency dynamically, using a strategy that allows for more flexibility in the number and timing of currency decisions. Following this course, the currency manager increases or decreases the fund's currency exposure, depending on its 'view' of the currency. The approach follows the same philosophy that MD's fund managers use; in fact, the two work toward the same goal, though independent of each other. This enables the fund managers to work with the same degree of independence they've always had—using their expertise and insight to achieve the fund's objectives—while the currency manager adjusts according to its view.

"In effect, the client benefits from three sets of expert opinions: our internal team of investment professionals, complemented by leading equity managers, and now superb currency managers," says Jean-François Bordeleau, Manager, Investment Sales Group. "By following a dynamic, flexible approach, MD steers a distinctive course between the two, more traditional forms of currency management."

One form—passive currency hedging—eliminates all foreign currency exposure. That's fine when the loonie flexes its muscles, like it has recently, but it fails to offer protection when it dips.

At the other end of the spectrum, treating currency as an asset unto itself and exclusively seeking returns by actively trading currencies—arbitrage in its most basic form—is viewed as being a risky venture at the best of times.

A dynamic currency management strategy provides an intelligent decision framework that enables the currency manager to determine how much, and when, currency management takes place. Its flexibility provides effective management of many currencies—not simply the U.S. dollar, Canada's traditional benchmark—and can be applied to all MD investments that have foreign components.

The MD family of mutual funds is managed by MD Physician Services Inc.

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