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How Do Currency Shifts Affect International Investments?

By Motley Fool Staff - Oct 30, 2016 at 11:45AM

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It's important to have some global equities in your portfolio, but be aware they come with added risks due to the unpredictability of foreign exchange rates.

International investing comes with its fair share of unique challenges, prominent among them, exchange rate fluctuations. While exposure to global currencies provides diversification, it can also affect considerations such as dividend payments.

In this clip from The Motley Fool's Industry Focus: Healthcare podcast, healthcare analyst Kristine Harjes and Fool Funds portfolio manager Charly Travers discuss how investors should approach currency issues when investing globally.

A full transcript follows the video.

This podcast was recorded on Oct. 19, 2016.

Kristine Harjes: Is currency another risk to add to that equation?

Charly Travers: Yeah, I'd put currency as No. 2 on our risks. We invest directly overseas in a lot of cases, so we want to own the companies on their local markets. We think there's benefits of currency diversification. But that's a double-edged sword. We have no ability to claim which direction currencies are going to move. So, sometimes -- take Brazil for example, in recent history -- when that currency moves against you, you could be doing great in the local market, and then when the results are translated to dollars for our performance reporting, it can be pretty painful.

Harjes: That's interesting. Just to clarify what you mean by that, GlaxoSmithKline trades on the London Stock Exchange, as well as over here on the New York Stock Exchange. So, you guys would pick the London version to buy shares in?

Travers: That's a case-by-case basis. But in certain cases...

Harjes: But that's what you meant by that?

Travers: Yes, we could buy stocks in London and Tokyo, wherever. But then you're owning them in British pounds or yen, and your results are not just dependent on how well the business is doing and the price you paid for the stuff, but what the currencies are doing as well. That's something we have no control over. Sometimes it's frustrating. Sometimes it works to our advantage.

Harjes: Right, and I assume that affects the dividend payment as well.

Travers: Right. There were years, Novartis, one of the big pharmaceutical companies, a Swiss business, paid their dividend in Swiss francs. There was a five-year run where American investors who owned it in francs were doing so great, because the Swiss franc was so strong, and they were getting those dividend payments in a strong currency.

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