If you invested in a sterling hedged version of a Japan fund a couple of years ago, you are probably feeling very pleased with yourself. Since January 2013, it has been far better to be hedged than unhedged in Japan.
A currency hedge aims to take the foreign currency return out of the equation. Without hedging, an investor’s return will be the foreign portfolio return plus the foreign currency return. For sterling investors in Japan, to be unhedged or hedged is an important decision, as currency can have a huge impact on returns.
In 2011 as the yen strengthened it was better to be unhedged. In January 2013, we advised investors to hedge their Japan exposure using two then relatively new Japan exchange traded funds (ETFs) that had sterling hedged share classes: iShares MSCI Japan Monthly GBP Hedged (IJPH) and db X-trackers MSCI Japan GBP Hedged TRN Index ETF (XMJG). The Japanese yen went on to depreciate markedly against other major currencies, including sterling.