Foreign denomininated Mutual Funds?

Question

By investing US dollars DIRECTLY into a foreign denominated mutual fund ( Say an Italy or Russia based Mutual fund comapny)does this give you higher returns than stated on their prospectus? Higher returns because it might be more speculative ?

Answer 1

You mean a mutual fund denominated in a foreign currency - like a Russian fund priced in roubles or a Italian fund priced in euros?

It is possible for you to do that, but I believe the US regulator places significant restrictions on funds that can accept American investors. Buying a foreign fund means you're accepting a currency risk. If you buy a fund priced in euros and the dollar/euro exchange rate changes that will affect the amount you get back when you sell your investment. So it could be considered more speculative.

The US dollar is likely to fall heavily over the next few years because of the trade defecit so that exchange rate risk will probavly work in your favour. I would advise against trying to buy a Russian fund, they are very risky because the country gives almost no protection to private investors. Generally the countries who have currencies that are likely to appreciate over the next few years are those with oil or a lot of commodities (eg: Australia or Canada).

Most mutual fund companies offer funds in more than one currency. Try Fidelity first, although they're based in the US they should still offer some funds priced in foreign currencies.

Answer 2

First of all, there is no return stated in a fund's prospectus. Ever. There may be information on historical returns, but the law requires the fund to state that past performance does not guarantee future results.

More to the point, the contribution of currency to total return depends on the currency and the time period. Institutions often separate portfolio management from currency management and hire separate managers for them. The portfolio manager proper is tasked with achieving acceptable returns in local currency. The currency manager (or, as it is commonly called, the currency overlay manager) decides whether the exposure to foreign currencies should be neutralized (hedged) for the time being or not. A good currency overlay manager can add one or two precentage points to mean return while lowering the volatility of the portfolio.