I’m often asked what I think of currency hedging.

The short answer is we don’t hedge our equity portfolio, nor will we hedge it in the future, for several reasons. We adopted this stance after attempting to hedge our portfolio in the early days after its launch 20 years ago.

We learned this isn’t what we’re good at. Hedging currencies successfully requires perfect timing. But we know from experience that timing is a very poor way to try to add alpha.

Also, as international equity investors, we’re investing for the most part in companies with global businesses. The global footprint of these companies is, to a great extent, a natural hedge in and of itself with assets, liabilities, revenue streams, and costs in all major currencies.

Hedging a bond is a very different proposition. With a bond you know exactly what you’ve got. Bonds provide you with a set of cash flows over a clearly defined timeframe in a specific currency. But with an equity that is not true at all.

The Problem with Hedging Equity Investments

The problem with hedging an equity investment is not only are you trying to hedge a moving target, you’re trying to hedge a target you cannot see. You don’t know what the net foreign currency exposures are, nor to what extent there is a transaction versus a translation exposure. You don’t know the degree to which the companies in the portfolio have hedged themselves. You don’t even know what the durations of those hedges might be―or their reactivity relative to all of the Greek letters.

Hedging sounds like it should be a neat, plausible way to mitigate risk. In reality, it’s an overlay that is, in my view, completely separated from the fundamentals of the accumulated revenue streams of each of the companies in one’s portfolio.

And to top it all off, it’s a very expensive overlay.

There are some people who are talented at timing and therefore hedging. We are not among them. Our strength lies in long-term stock picking, as shown by our 20-year track record. That is the activity we’ll continue to focus on.

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