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Expat Investor : October 2007
October 2007 EXPAT INVESTOR 13 QUOTE, UNQUOTE *AER stands for Annual Equivalent Rate which is a notional rate illustrating the contractual rate as if paid and compounded on an annual basis. Zurich Bank International Limited, PO Box 422, Lord Street, Douglas, Isle of Man, IM99 3AF, British Isles. Telephone: +44 (0) 1624 671666 Fax: +44 (0) 1624 627526. www.zurichbankinternational.com Registered office: 43-51 Athol Street, Douglas, Isle of Man, IM99 1ET, British Isles. Zurich Bank International Limited is registered in the Isle of Man Number 22847. Telephone calls may be recorded. Licensed by the Isle of Man Financial Supervision Commission for Banking Business. To find out more, or request an application form call: +44 (0)1624 671666 (quoting ref no. EP2) Email: email@example.com or visit our website What if we could make our interest rate even more interesting? 6.60% GROSS PA/AER* Fixed for 1 year! Zurich Bank International R We're fixing it for a year! The Zurich Bank International 1 Year Fixed Rate Bond (Issue 4) gives you a superb annual interest rate of 6.60% gross. So if you want your money to work hard for the next 12 months, call us for an application form today. • Interest rate fixed for one year from account opening • minimum balance £10,000 • limited issue. www.zurichbankinternational.com Currency risk arises from the change in price of one currency against another. In the case of a fund, the currency risk is dependent on how the underlying assets behave and not the denomination of the fund itself. The example shows a fund holding a single stock that is priced in US dollars and looks at the returns for a sterling investor. This demonstrates the impact currency can have on the fund's overall rate of return and shows it is possible to make a profit from currency changes alone. In this case, the sterling investor has made money simply through the weakening of the currency. Although, the reverse is also true; if sterling had strengthened in value to £1: US$4, the stock would have been worth only £25 when sold. Another common misconception is that the denomination of a fund is a reflection of its underlying assets or an indication of security. For example, if you look at a dollar denominated fund with an objective to invest in a range of global stocks, all investors will be exposed to a basket of global currencies -- not just the dollar. If that fund's assets were simply spread across global stock markets in line with their relative market sizes, the fund could be invested as follows, with those investments likely following the principal currencies in those regions: UK (£) 11% Europe ( ) 20% US ($) 53% Pacific (various) 4% Japan (¥) 12% It is important that investors understand this to avoid confusion and misunderstanding. Specifically, investors could mistakenly believe that a fund denominated in dollars gives them added security over a fund denominated in another currency. Confusion can also occur with the impact of a fund's currency denomination on investment returns. As long as proceeds are to be taken in the same currency as the original investment, the fund denomination is irrelevant, as demonstrated below. The Royal Skandia Aberdeen Wo rld Equity Fund produced the following returns between 1 June 2001 and 1 June 2006. £ priced units produced a loss of 5.6% over the period * US$ priced units produced a return of 24.5% over the same period * With hindsight, investors would naturally think they should have invested in the dollar priced units. Yet in reality, the choice of units has no impact on the eventual returns as illustrated in the examples below: Example one On 1 June 2001, an investor places £100,000 into the sterling denominated Royal Skandia Aberdeen World Equity Fund. A loss of 5.6% was produced over the period. So, on 1 June 2006, the fund value was £94,000 (£100,000 less 5.6%). Covering currencies from all angles Fast Facts 88010 Fast Facts 88400 Example two On 1 June 2001, an investor places the equivalent of £100,000 into the US dollar units of the Royal Skandia Aberdeen World Equity Fund. At prevailing exchange rates (£1 = US$1.416) = US$141,600. A return of 24.5% was produced over the period. So, on 1 June 2006, the fund value was US$176,292 (US$114,600 + 24.5%). At prevailing exchange rates the fund value in sterling was £94,400 (£1 = US$1.868) As we can see, the returns were very similar irrespective of the routes taken to invest in the fund. Minimising currency risk The volatility and unpredictability of a currency's relative value means that there is always a risk of it adversely affecting an investor's returns when they wish to take money out of their investment. One way of minimising the impact of these changes could be to hedge against currency risk by using a method called derivatives. However, this is a highly specialised area that in practical terms is not available to most investors. As an alternative to hedging, investors could consider having a suitably diversified portfolio that gives them exposure to a range of currencies and markets so they are not heavily exposed to the fortunes of any particular market or currency. Currency movements will affect the returns produced by a fund if it invests internationally. But investors should focus on building a diversified portfolio rather than trying to second guess currency markets. And when it comes to deciding on the denomination of a policy in relation to the fund's, currency denomination is irrelevant so long as the policy proceeds are to be realised in the same currency as the original investment. *Source: bid to bid, Financial Express To find out more about offshore bonds from Skandia Inter national, enquire through the fast facts number below. In the second part of his case for offshore bonds, Adrian Smith, Marketing Manager with Skandia International, explains the part currencies play in this type of investment. At time of purchase At time of sale Result Stock price (US$) US$100 US$100 Actual stock price remains the same Exchange rate US$2 = £1 US$1.25 = £1 £ loses value against US$ Stock price (£) using exchange rate £50 £80 Stock value increases in £