Over the past few months, the New Zealand Dollar has fallen in value against other major currencies such as the US Dollar. While the NZD might not be as strong as it once was, this isn’t entirely negative.

For investors funnelling their money out of the country into foreign investment opportunities, the combination of sinking dairy prices, a cold front on the housing market and low-interest rates back at home, the lowering value of the Kiwi Dollar has been mostly positive.

Those who sought to invest their Kiwi Dollar overseas are seeing a great return on the conversion from foreign currency back into NZD, which has been previously viewed by some as overvalued.

Today (31 August) * the NZD is worth 0.67* against the USD whereas it’s 1 USD to 1.50 NZD – and that’s after the Kiwi Dollar had seen a slight bounce back earlier in the month, so you can see the allure.

Up to 31 July, the MSCI World Index in NZD returned +23.2%, substantially exceeding the +13.9% return from the World Index on a 100% NZD hedged basis.

So, if you invested in overseas shares (as represented by the MSCI World Index), there’s quite a boost from the fall in the NZD during that period. But there’s the risk that the inverse can happen too, that’s why investors will choose a “hedged” approach which removes the fluctuations in currency.

AMP Capital noted in their Winter Edition of ‘Taking Stock’ magazine, that “For New Zealand-based investors, holding specific foreign currency exposures can provide some protection during sudden, unexpected shocks to global share markets. However, for more defensive international assets such as bonds and alternatives, a high degree of hedging is usually advantageous”.

As with any discussion regarding asset allocation, an appropriate hedging philosophy and strategy is key to portfolio composition. While some portfolio solutions may have hedging built in, others won’t. The amount of currency management a portfolio has is tied to a client’s long-term goals and risk tolerance rather than any short-term opportunity. Certainly, by investing in assets other than just New Zealand based assets, we are currently seeing some positive portfolio movements tied to the local currency.

If you would like any more information on the value of the dollar and how this could benefit you, talk with your Adviser about foreign investment opportunities.

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