September Newsletter

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September 2025 Financial Insights Newsletter

By Genti Cici, CFP®, CAIA

September 9, 2025

Currency Diversification: Enhancing Returns While Mitigating Risks

Dear Valued Clients and Prospects,

Our flagship global investment portfolio provides exposure to foreign companies and international firms with assets denominated in both U.S. dollar and non-U.S. dollar currencies. This strategy not only enhances potential returns but also reduces portfolio risks through effective diversification.

1. Understanding Your Exposure to Foreign Currencies

Many investors may not realize their exposure to foreign currencies. By investing in our portfolios, clients gain indirect access to a diverse range of international currencies, broadening their asset base beyond the U.S. dollar. This approach can enhance resilience against domestic economic fluctuations, offering stability during volatile market conditions.

2. Why Currency Diversification Works

Diversifying across currencies enhances returns and mitigates risks by offsetting volatility in any single currency. For example, during periods of U.S. dollar strength, such as in 2022 when the dollar appreciated by over 10% against major currencies due to Federal Reserve rate hikes, holdings in euro- or yen-denominated assets served as a hedge against U.S. inflation pressures while allowing investors to acquire additional foreign assets at lower dollar costs. Conversely, in 2018-2019, when emerging market currencies weakened, diversified portfolios benefited from U.S. dollar stability. Historical data from the MSCI World Index indicates that currency-diversified portfolios have achieved annualized returns 1-2% higher than non-diversified ones over the past decade, with reduced volatility (lower standard deviation).

3. Benefits for International Clients Investing in U.S. Dollar Assets

For our international clients, particularly those in Korea, investing in U.S. dollar-denominated assets offers significant diversification benefits. For instance, a client holding primarily Korean won assets can mitigate risks from local currency devaluation—such as the won’s 15% decline against the dollar in 2022—by allocating to high-quality U.S. and global companies. This strategy provides access to stable USD returns and reduces the risks associated with holding a single home currency.

4. Hedging Options to Manage Currency Exposure

For clients seeking exposure to U.S. and global equities without currency-related risks, we offer tailored solutions to neutralize exchange rate volatility. By utilizing currency-hedged strategies or exchange-traded funds (ETFs) that employ forward contracts, we ensure returns are driven primarily by asset performance, minimizing the impact of currency fluctuations.

5. Currency Diversification as an Inflation Hedge

In an era of persistent inflation and divergent central bank policies, currency diversification serves as a natural hedge. Allocating to currencies from commodity-exporting nations, such as the Australian or Canadian dollar, has historically provided protection during inflationary periods, as these currencies often appreciate with rising commodity prices. Our portfolios incorporate such allocations to safeguard long-term purchasing power.

6. Mitigating Geopolitical Risks Through Currency Diversification

Geopolitical events, such as trade tensions or political instability, can trigger sharp currency swings. A relevant example is the Korean won’s volatility in December 2024, driven by political turmoil following President Yoon Suk Yeol’s short-lived martial law declaration, which led to a 6% drop against the U.S. dollar for the month of December. Investors diversified across currencies, such as the U.S. dollar or euro, avoided concentrated losses from KRW-denominated assets, benefiting from the stability of global currencies. Additionally, Korean clients investing in U.S. dollar assets could have achieved an additional currency return of about 17% over the past five years (chart below), complementing and in addition to any asset-level gains.

7. Practical Steps for Implementing Currency Diversification

We recommend starting with a portfolio review to assess your current currency exposure. Our team can customize allocations using diversified ETFs or mutual funds, targeting 20-40% non-U.S. dollar holdings based on your risk tolerance and objectives. For our international clients, particularly in Korea, our U.S.-focused portfolios can allocate 60-80% to U.S. dollar-based assets, leveraging the strength and breadth of the U.S. financial system while diversifying single-country or geopolitical risks. Contact us to schedule a consultation and explore how currency diversification can optimize your investments.