Conservative investors try various tricks in their effort to make a ‘risk-free’ profit. Recently, several investment products appeared that pretend to be a ‘safe’ investment. They hide their real nature under marketing names such as Premium Deposit or Premium Deposit Plus. They are based on the principle that the client earns approximately 2 to 3% p.a. in the case of favourable development. If things go wrong, the original euro-investment is converted, for example, to the US dollar or another currency. This means that you agree on a term deposit for, say, two weeks in euro. If the EUR/USD exchange rate is higher on the maturity date of the term deposit than upon its opening, you will receive the agreed interest, but your investment will be converted to USD. This may mean that in the end you will lose one part of your principal.
Without investment logic
With each investment made outside the framework of the reference currency (which is the euro for 99% of Slovaks), the investor takes on the so-called currency risk. This shifts any conservative investment to a speculative level – as an example, we can use an investment into seemingly safe state bonds in Turkish lira. One successful investor said: “When you’re investing, it doesn’t really matter how much you earn when you’re right, but how much you lose when you’re wrong”. For example, the average monthly fluctuation of the EUR/USD currency pair in the past 10 years is approximately 3%. In extreme cases, the exchange rate could move as much as 8% in a single month, and we can even find larger fluctuations in the more distant past.
Currency risk is a risk that all investors should avoid – mainly conservative investors. It does not bring any added value; there’s no investment logic or inherent laws behind it (with the exception of some specific situations). When investing in stocks, it is evident that in the long-term perspective, they have growing tendency, as to a certain degree they mirror global growth and progress of the world economy as a whole. Investing in small and medium-sized corporations is riskier than investments into large established global players and should bring higher revenue. But currencies? They hardly offer any similar logic.
Good servant, bad master
Foreign currencies are like fire – a good servant but a bad master. If somebody offers you a safe investment that incorporates a currency risk, you should be careful. Currency risk in our two conservative solutions – Across Intelligent Bond Portfolio+ and Across Bond+ is eliminated to the maximum possible extent. The results of both products prove that we are making the right decisions. In the past three years Across Bond+ is the best-performing bond fund in the world focusing on bonds from Central and Eastern Europe, while Across Intelligent Bond Portfolio+ outpaces most of its global competitors.