Share Class Hedging

Introduction

Investors investing in a fund with its base currency different from their own local currency are subject to the risk of currency fluctuations between their local currency and the fund's base currency. Without currency hedging, European investors e.g. would record a profit or loss due to the fluctuating EUR-USD exchange rate. If the fund generates a positive performance in its base currency, the currency translation into the local currency of the investor may nevertheless lead to a negative result, if the base currency has lost against the local currency during the investment period.

The following Q&A section provides an overview of the approach of currency hedging applied by Franklin Templeton Investments.

What is currency hedging?

A share class of a fund is hedged if it is identified with the symbol H1

What is NAV share class hedging?

  • The intention is to reduce the impact of movements in the exchange rate between the currency used by an investor to buy shares in a fund and the base currency of that fund.
  • It is an attempt to make the NAV performance consistent for shareholders of two different currency classes e.g. to provide a EUR investor with approximately the same returns as a USD investor.
  • Note: The returns will not be the same due to the cost of the hedge (primarily interest rate differential) and short term over and under hedging due to subscriptions and redemptions activity.

Would NAV share class hedging eliminate my risk?

  • It does not eliminate currency risk within a fund’s investment portfolio (e.g. If a fund holds assets which are denominated in a different currency from its base currency the returns from these assets may be affected – either positively or negatively - by movements in exchange rates) however the fund manager may or may not chose to reduce currency risk by altering the fund’s currency exposure as part of the investment strategy adopted for the fund.
  • In theory the performance of the hedge class NAV will track the currency of the base class NAV, in practice they will differ slightly due to factors such as the timing (the FX currency contracts used to provide the hedge will generally be executed using the NAV of the on the previous day) and costs of the hedging.

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