Given that we consider the Canadian dollar to be undervalued in relation to the US dollar, we generally recommend you hedge your currency risk when investing south of the border.
The Canadian dollar is undervalued in relation to the US dollar. Here’s a fund that lets you hedge that currency risk when investing in the USA.
Despite higher stock valuations south of the border, we continue to recommend you hold US equities in your portfolio as a means of diversifying and obtaining exposure to important areas of the economy that are under-represented in Canada. In particular, we’re thinking of technology stocks and healthcare stocks. Nonetheless, somewhat high valuations of US stocks suggest a modest monthly contribution to a US equity fund is a good way to proceed for now.
Among managed US equity funds, we recommend PH&N US Equity Currency Neutral Fund Series D (Fund codes: RBF1560 (NL)). We recommend the hedged version of this fund because we consider the Canadian dollar to be undervalued in relation to the US dollar now.
If the Canadian dollar rises against the US dollar as it has been doing lately, your returns from a non-currency-hedged fund that invests in the US will be eroded. Currency-hedging in these circumstances, then, is beneficial for your results.
Hedging is a double-edged sword
If the Canadian dollar weakens against the US dollar, however, your returns from a hedged fund will lag those of a non-hedged fund. Either way, currency hedging is supposed to give you a result that approximates the underlying return of US equities without the positive or negative impact of foreign-currency fluctuations.
The objectives of the currency-neutral version of PH&N US Equity Fund are to provide significant long-term capital growth primarily through exposure to a well-diversified portfolio of quality US common stocks, while minimizing currency risk.
PH&N US Equity gives you considerable exposure to technology stocks and healthcare stocks and not so much to the financial and resource sectors, which are heavily represented in the Canadian market.
Here’s the fund’s sector breakdown: technology, 23.0 per cent; financials, 14.4 per cent; healthcare, 13.5 per cent; communications services, 10.9 per cent; industrials, 9.3 per cent; consumer discretionary, 8.8 per cent; consumer staples, 7.8 per cent; energy, 5.1 per cent; utilities, 2.7 per cent; materials, 2.3 per cent; and real estate, 2.2 per cent.
The fund’s management expense ratio is 1.03 per cent.
The US central bank is likely to continue lowering interest rates. And if the US reaches a satisfactory trade arrangement with China, both these factors would be positive for high-quality US stocks.
PH&N is a buy if you can tolerate medium to high investment risk and you want exposure to investments in high-quality US growth stocks.
Top-10 stock holdings
Here are the fund’s top-10 holdings: Microsoft Corp. (computer software), 4.9 per cent; Apple Inc. (computer and peripherals), 3.7 per cent; Amazon.com Inc. (Internet), 3.1 per cent; Alphabet Inc. (Internet), 2.8 per cent; Facebook Inc. (Internet), 2.5 per cent; Berkshire Hathaway, (property/casualty insurance), 2.3 per cent; JP Morgan Chase & Co. (banking), 2.0 per cent; Visa Inc. (diversified financial services), 1.8 per cent; Johnson & Johnson (medical supplies), 1.8 per cent; and Exxon Mobil Corp. (integrated petroleum), 1.8 per cent.
These top-10 holdings make up about a quarter of the fund’s assets. They hold dominating positions in their industries. For example, Microsoft in the largest independent maker of software products for a wide range of computing environments.
The fund has a total of 149 holdings, with 4.6 per cent of the portfolio in cash.
This is an edited version of an article that was originally published for subscribers in the November 1, 2019, issue of Money Reporter. You can profit from the award-winning advice subscribers receive regularly in Money Reporter.
Money Reporter, MPL Communications Inc.
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Money Reporter •11/26/19 •