Staying Home Can Be Risky

By Mary Holm

Monday 5th March 2001

Exposing your investments to foreign exchange fluctuations is risky, right? Actually, it's riskier not to.

One frequently stated argument for investing offshore is that it spreads your risk. If the New Zealand markets are doing poorly, markets elsewhere might not be.

The value of a portfolio that includes foreign assets, therefore, will fluctuate less over the long term.

But there's another argument that is equally valid. We should think about what we're going to ultimately spend our savings on, says Paul Dyer of AMP Henderson Global Investors.

"New Zealanders drive imported cars, watch the Olympics on Sony or Phillips TVs, talk on Nokia cell phones, use Microsoft software on their Toshiba or IBM computers, holiday abroad and so forth," says Dyer in a recent paper.

He adds - just in case we hadn't noticed lately - "The level of the New Zealand dollar directly impacts on the cost of these activities."

But it also impacts on offshore investments, in the opposite way. When the kiwi dollar falls, the value of investments in other currencies rises.

If you had been saving for several years to buy an American car, and your savings were in a US share fund, the falling kiwi would raise the price of the car. But it would also raise your savings.

By matching your foreign currency exposure on the spending and savings sides, you neutralise it. This is called hedging.

It cuts both ways, of course. If the kiwi rises, car prices would fall, but so would the value of your savings. You would miss out on winning from currency movements. But you would also miss out on losing. Your risk level is lower.

If you're saving for retirement, things aren't so clear. A large part of what you spend when you retire will be on locally produced goods and services.

Taking all of that into account, Dyer reckons that New Zealanders who owns their homes are best hedged against currency movements if about half their investments are offshore.

He acknowledges that many people "may baulk at moving (their money) abroad, given the current low level of the currency. The New Zealand dollar has fallen by almost 30 per cent since its peak in early 1997." But, he adds, "this does NOT alter our broad conclusions."

Just because our dollar has fallen fast, that doesn't necessarily mean it will bounce back again.

"We do not believe it is much undervalued," he says. "Recent levels of $US 60c and above were an aberration.

"Remember, New Zealand has a chronic and longstanding balance of payments problem, steadily rising foreign liabilities, terms of trade in long-term decline and a poor productivity record."

That doesn't sound like a country you want all your eggs in, does it!

Dyer concludes that investors who mismatch their savings and their expected spending - by keeping most or all their investments in New Zealand - may be taking far more risk than those who venture offshore.

TSB and HECs

In a recent column I said TSB Bank offers a type of home equity conversion (HEC) loan that enables retired people to make use of some of the equity in their home.

The bank now points out, though, that their HECs are available only to people with "a significant banking relationship" with TSB for at least two years.

Sorry to any readers who contacted TSB and were disappointed. Note, though, that Dorchester Pacific, a subsidiary of Invincible Life that also offers HECs, has no similar restrictions.

Mary Holm is a freelance journalist and author of "Investing Made Simple", commissioned by the New Zealand Stock Exchange to write an independent personal investment column. She can be reached by E-mail at maryh@journalist.com. Sorry, but she cannot respond directly to readers.

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