One common objection I have encountered is that potential investors will be wary of the potential currency risk in unit trusts and any adverse movements in currencies will have adverse impact on returns. Very often, I even heard of investors or even financial advisers having the common misconception that currency exposures are hedged to the base currency, in the case of Singapore Unit Trusts, SGD.
The reality is that more often than not, currency exposure is not hedged and most unit trust are exposed to currency risks as a result of the underlying assets that the fund invests in.
So then, how to handle this objection???
Well, it is actually quite simple. Yes, there is underlying currency exposure, but just how much can currency affect a portfolio?
Say look at Boeing, the world leading commercial aircraft manufacturer. In 22nd Oct 2001, Boeing Stock Price closes at USD$33.80, fast forward to today, 5 years later, it closed USD$81.74 on 21st Oct 2006, whopping return of 142%!!! For financial advisers who encountered this problem, ask your potential client to find a major currency that depreciates to the extend that the 142% gain is completely wiped out.
Not convinced? Football Club Newcastle United Share Price has move almost 250% in 5 years, Apple Computer price in 22 Oct 2002 was USD$14.70, it is USD$79.95 as of 21 Oct 2006, a rise of 443%! There are many examples of 4-5 baggers stocks that move more than 100%, some even more. In contrast, it'll be extremely rare if any to find any currencies that depreciates to that magnitude. So if your potential clients are worried about currency exposure, ask them to look at the potential opportunity costs by quoting the example mentioned.
Furthermore, in a global portfolio, chances that losses in a currency will be offset by gains in others.
This story can also be used to convince clients that there are more opportunities in overseas market as compared to just investing in Singapore.
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