DIY Investor Magazine
| August 2017
38
Currency risk
adds an extra dimension of
diversification for a global equity portfolio that’s volatile,
but it’s best avoided in the minimal risk portion of
your portfolio. You can solve this part of the puzzle by
investing in government bonds valued in your home
currency or ETFs that hedge overseas assets back to
the pound.
GOVERNMENT BOND DIVERSIFICATION
The flipside is that you can maximise
by
investing in government bonds that offer larger yields in
different currencies and across a range of maturities.
Emerging market government bonds are particularly
useful here and can be valued in their local currency or
the US dollar.
RISKS ASSOCIATED WITH
GOVERNMENT BOND ETFS
•
Rising interest rates
•
Increasing inflation
•
Default or decreasing
credit quality of the
bond issuer
•
Stronger home currency
(GBP) and weaker bond
currency
How does this tally with minimising currency risk? You
square the circle by allocating government bonds that
are exposed to currency risk to the growth / equity
portion of your portfolio.
Their job is to diversify your sources of return and not to
protect your portfolio from volatility.
Although you can buy individual bonds directly from
your broker or even from the government’s Debt
Management Office, it’s a time-consuming and often
expensive process as the bond market is geared
towards major financial players that normally buy bonds
in massive quantities.
As ever, small investors, can cheaply and conveniently
diversify their portfolio by sticking to ETFs.
