Strong pound may harm overseas investment returns

New research by Interactive Investor shows that in 2009 those invested in an American fund, based on the performance of the S&P, may, despite a 9.3 percent market return year-to-date, actually have lost over 5 percent.

The reason is that sterling has rallied so strongly against the dollar rising briefly above $1.70 for the first time since October. Similarly, a sterling fund based on the Nikkei will have returned on average -3.2 percent, despite the index being up 16.9 percent year-to-date.

Rebecca O'Keeffe, head of investment at Interactive Investor, said: "While in the past asset allocation and market timing have always been the primary focus of attention for investments, the recent volatility of currency markets has become an increasing important factor for investors to consider.

"Sterling has benefitted from more positive market sentiment and a return of risk taking. The Dollar, which is typically seen as the safe-haven currency, has fallen as US investors invest a larger proportion of their cash holdings overseas.

"These currency movements have a significant effect on the return achieved by UK investors in overseas equity markets as sterling has risen aggressively against many major currencies since the start of 2009. So, in many cases, while achieving positive equity returns, investors may actually have found themselves losing money.

"Even European investments will have suffered, with an equity return of 9.4 percent turned into -3 percent as a result of currency moves against the Euro. And the Nasdaq return of 25 percent in 2009 would actually be less than 9 percent for a sterling investor.

"Some funds are hedged against their relevant currencies. In this case investors are protected to a certain extent from adverse movements in the exchange rate.

"The bottom line is that it is not enough simply to be concerned about where you are invested and what your equity market entry point is. You also need to be aware of sterling and its possible currency moves, as this plays a huge part in the returns you may achieve on your investments."