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International real estate investors are inadvertent currency speculators, facing currency risk from unhedged investments. As a result, they receive two returns: the performance of the real estate asset itself, plus the return on the currency used to purchase the security. Currency volatility can be significant, and the return from the currency can sometimes swamp the gain or loss on the foreign security.
It is hard to disagree with the assertion that ‘Because global real estate portfolios contain assets influenced by different national economies, with very different drivers, growth rates, and risk, the correlation of total returns between assets in these markets can be very low’. However, the effect of currency adjusted is considerable. The Australian Dollar, for example, is a relatively volatile currency, with its value strongly correlated with commodity prices, and capable of daily movements of up to 1% either way. The authors compared an optimal global portfolio (on the efficient frontier in terms of returns vs risk) with a US portfolio, and found that it would have outperformed by a colossal 171%. But this out-performance is overstated if the effect of exchange rate movements is considered. The outperformance is still visible, but it falls to 92%, a difference that every investor should regard as very significant. The effect of falls in local currency against the USD are the most obvious recent example, especially for countries such as Nigeria and Egypt that have experienced both very rapid and considerable declines. Experienced local investors in both those countries have in recent decades sought to balance their exposure to their national currency with USD investments, whether in the Gulf or the USA itself.
The Russell Group’s Conscious Currency™ investment approach concludes that investors should measure and model currency as a separate exposure set, based on the behaviour of specific currency markets. Crucially, in this approach, ‘investors need not believe that currency is an asset class, nor that it has a positive long-term return: they simply need to believe that a better description of portfolio risks will generally allow better management of those risks’. This entire approach is in marked contrast to a ‘diversified currency’ investment approach, which largely makes the heroic assumption that investors are of sufficient size to diversify adequately as to minimise currency risk, despite the fact that ‘for investors with only limited capital to deploy a currency diversification strategy via a large portfolio of properties might not be an option’. Such an investor would be well advised to attend to the Russell Group’s recommendation.
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 Hastings, A. and Nordby, M. (2009) Benefits of Global Diversification on a Global Portfolio. Journal of Superannuation Management 3(1) 73-82. Available at:
https://www.fssuper.com.au/media/library/CPD/PDFs/Journals/FS_Super/Volume%203/Number%201/JSM_v3n1_Hastings_09.pdf Retrieved 21 May 2019. P.73
 Russell Group (2019) Currency Overlay. Available at: https://russellinvestments.com/nz/solutions/implementation-services/currency-management/currency-overlay Retrieved 17 May 2019.
 Bejol, P. and Livingstone, N. (2018) Revisiting currency swaps: hedging real estate investments in global city markets. Journal of Property Investment & Finance 36(2), 191-209, p.192.
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