Currency Risk in Unit Trusts: Why Your Overseas Fund Can Rise While Your Ringgit Return Falls
Imagine you invest: RM100,000 into an overseas equity unit trust. Over the next year, the foreign stock market performs well. The underlying investments rise by: 10%. You expect your investment to be worth roughly: RM110,000. But when you check your actual return in ringgit, the gain is much smaller.
How can that happen?
Because when Malaysians invest internationally, there can be two moving parts affecting the result:
The performance of the underlying investment
The movement of the relevant foreign currencies against the Malaysian ringgit
This second factor is known as currency risk or foreign exchange risk.
An international fund can perform very well in its local market while delivering a weaker return to a Malaysian investor after currency translation. The opposite can also happen. A foreign investment may perform only modestly, but a weaker ringgit against the relevant currency may improve the ringgit-denominated result. This is why international investment returns should never be analysed purely by looking at the foreign market.
Think of International Returns in Two Layers
A simplified way to think about overseas investing is:
Ringgit return = Investment return + Currency effect
But mathematically, it is more accurate to say the two effects interact multiplicatively.
A simple formula is:
Ringgit Return = (1 + Foreign Asset Return) × (1 + Currency Return) − 1
The currency return here represents the change in the foreign currency relative to ringgit from the Malaysian investor's perspective.
A Simple Example
Suppose:
Initial investment: RM100,000.
Foreign asset return: +8%.
Currency movement: −5% from the Malaysian investor's perspective.
The exact result is: 1.08 × 0.95 − 1 = approximately: +2.6%.
So the investment may be worth roughly: RM102,600 not RM108,000. The foreign investment itself performed well. But part of the gain was offset by currency movement.
This illustrates an important principle:
A good foreign-market return does not automatically produce the same return in ringgit.
Why Simply Subtracting Percentages Is Only an Approximation
You may sometimes hear:
“The fund gained 8%, currency hurt by 5%, so I made 3%.”
That is close, but not mathematically exact. Because the investment return and currency return compound together: 1.08 × 0.95 = 1.026. So the actual simplified return is: 2.6%.
For small percentage movements, simple addition or subtraction can provide a rough estimate. For larger movements, the difference becomes more meaningful.
What Happens If Currency Helps You?
Currency exposure is not automatically negative.
Suppose the foreign investment rises: 5%.
At the same time, the foreign currency strengthens: 8% against the ringgit.
The simplified ringgit return becomes: 1.05 × 1.08 − 1 ≈ 13.4%.
The underlying investment earned only 5%..
But the Malaysian investor's return in ringgit was higher because of favourable currency movement.
Currency Can Also Reduce a Loss
Consider another example.
Foreign investment return: −6%.
Foreign currency strengthens against ringgit: +10%.
Simplified ringgit result: 0.94 × 1.10 − 1 ≈ +3.4%.
So even though the foreign asset declined in its local market, the currency movement could more than offset the decline when translated back into ringgit. Of course, the opposite could also occur.
Currency Risk Works Both Ways
This is a critical point. Currency risk is often discussed as if it only means:
“Foreign currency could hurt my return.”
A better definition is:
Currency movement can either increase or decrease your return in your home currency.
It introduces another source of uncertainty. It is neither automatically good nor automatically bad.
Why Does Currency Affect Your Unit Trust?
Suppose a Malaysian investor buys a global equity fund. The fund invests in:
US companies
European companies
Japanese companies
Asian companies
The underlying shares are priced in different local currencies. When the fund's assets are valued and eventually translated into the investor's reporting currency or ringgit-equivalent return, changes in those exchange rates can influence performance. Therefore, the investor's experience can differ from the performance of the underlying market.
Fund Currency Is Not the Same as Economic Currency Exposure
This is one of the most misunderstood concepts. Imagine a global unit trust is quoted in: US dollars. An investor may assume:
“This is a USD fund, so everything depends on the US dollar.”
Not necessarily. The fund may own:
US companies
European companies
Japanese companies
Emerging-market companies
Those businesses may generate revenue in many different currencies. Therefore, the fund's dealing or reporting currency does not necessarily represent its complete economic currency exposure.
Example: USD-Denominated Global Fund
Suppose a fund's unit price is quoted in USD. Its portfolio consists of:
50% US equities
20% European equities
15% Japanese equities
15% Asian equities
Calling it simply a:
“US-dollar investment”
would be incomplete. Its economic exposure is diversified across multiple markets and currencies. The correct approach is to look through the fund denomination and understand the underlying holdings.
Hedged vs Unhedged Share Classes
Some international funds offer different share classes.
For example:
Unhedged Class
Currency movements are generally allowed to affect the investor's return.
Currency-Hedged Class
The fund or share class uses financial instruments designed to reduce some of the impact of currency movements between specified currencies. This can result in different return experiences even when both share classes invest in the same underlying portfolio.
What Is Currency Hedging?
Currency hedging is a risk-management technique designed to reduce exposure to unwanted foreign-exchange fluctuations. For example, a fund might use:
Forward foreign-exchange contracts
Other permitted derivative instruments
to offset part of its currency exposure.
Conceptually:
If the foreign currency weakens, gains on the hedge may offset some of the currency loss.
If the foreign currency strengthens, the hedge may also reduce some of the currency benefit.
So hedging attempts to reduce currency volatility rather than predict the best direction.
Hedging Is Not Free
Another common misconception is:
“Hedged is always safer and therefore always better.”
Not necessarily. Hedging can involve:
Transaction costs
Interest-rate differentials
Rolling costs
Imperfect offsets
Operational differences
Therefore, a hedged share class may perform differently from an unhedged class even before considering market returns.
Hedging Does Not Eliminate Investment Risk
Suppose you own a hedged global equity fund. Currency risk may be reduced. But you still face:
Equity-market risk
Sector risk
Company risk
Geographic risk
Valuation risk
If global shares fall 20%, currency hedging does not automatically protect you against that market decline. Hedging addresses one source of risk—not every source.
Why Might an Investor Prefer an Unhedged Fund?
Unhedged exposure can potentially provide:
Currency diversification
Potential protection when ringgit weakens
Exposure to foreign-currency assets
For some long-term investors, this can form part of a diversified portfolio. But it can also increase volatility in ringgit terms. The appropriate choice depends on the investor's goals and portfolio structure.
Why Might an Investor Prefer a Hedged Fund?
A hedged fund may be considered when the investor wants the result to reflect more closely the underlying investment performance rather than foreign-exchange movements.
For example, an investor may want exposure primarily to: global bonds but may not want substantial currency volatility. Because bond returns can be lower and less volatile than equity returns, currency movements can sometimes dominate the total result. Therefore, currency hedging can be particularly relevant in fixed-income portfolios.
Currency Risk Can Matter More for Bond Funds
Consider a global bond fund expected to produce: 4%. If currency moves: 10% the currency effect can be much larger than the bond's expected annual return. That could completely alter the investor's ringgit outcome. This is one reason global fixed-income funds often deserve especially careful currency analysis.
Equities and Currency Risk
For global equities, currency exposure can still be significant. However, over long periods, company earnings and business models can themselves have international currency exposure. For example, a US-listed company may generate substantial revenue from:
Europe
Asia
Latin America
So even determining a company's “currency exposure” can be more complex than looking at where the share is listed.
Why Malaysians Should Still Consider Global Diversification
Understanding currency risk does not mean:
“Malaysians should avoid overseas investing.”
Global diversification can provide access to:
Broader industries
Different economies
Different business cycles
Global technology companies
Healthcare leaders
Consumer brands
Industrial businesses
The Malaysian market represents only part of the global investment universe. Currency risk is one consideration among many.
Home Bias Can Also Be a Risk
Many Malaysians already have substantial exposure to ringgit and Malaysia through:
Salary
Property
EPF
Business ownership
Bank deposits
If all investments are also concentrated locally, the investor may be highly dependent on one economy and one currency. Adding foreign exposure can therefore create diversification. The objective is not necessarily to eliminate currency exposure. It is to ensure that the exposure is understood and appropriate.
Your Future Spending Currency Matters
This is one of the more advanced ways to think about currency risk. Suppose two Malaysian families invest internationally.
Family A
Plans to retire entirely in Malaysia.
Future spending will mostly involve: Malaysian ringgit.
Family B
Plans to send a child to university in the United Kingdom.
Part of their future liability may be in: British pounds.
Their currency needs are different.
Match Assets With Future Liabilities
Imagine university fees in the UK cost: £40,000.
in several years. A family that saves only in ringgit remains exposed to the possibility that the pound strengthens substantially before tuition is due. Holding some appropriately structured foreign-currency assets may potentially reduce the mismatch between:
Assets: MYR and Future liability: GBP. This is known broadly as considering the currency of your future liabilities.
Another Example: Retirement Overseas
Suppose someone plans to retire partly in Australia. Their future expenses may include:
Rent
Healthcare
Living expenses
in Australian dollars.
That investor's appropriate currency exposure could differ from someone planning to spend retirement entirely in Malaysia. Investment planning should therefore consider:
Where will the money ultimately be spent?
Don't Turn Currency Investing Into Speculation
Understanding currency risk does not mean you should constantly forecast:
“USD will rise next month.”
“Ringgit will weaken next quarter.”
Currencies are influenced by many factors, including:
Interest rates
Inflation
Economic growth
Capital flows
Trade balances
Commodity prices
Political developments
Central-bank policy
Global investor sentiment
Consistently forecasting short-term exchange rates is extremely difficult.
Currency Markets Price Expectations
Like bond markets, currency markets respond to expectations. Suppose investors believe a central bank will raise interest rates six months from now. The currency may begin moving before the official decision occurs. Similarly, markets can react rapidly to:
Inflation data
Employment reports
Political events
Economic forecasts
By the time retail investors read the news, much of the expectation may already be reflected in the exchange rate.
Interest Rates and Currency
Interest-rate differences between countries can influence currency movements. All else equal, higher interest rates can make a currency more attractive to certain investors. But currency markets are not that simple. A country can have high interest rates because it also has:
High inflation
Political uncertainty
Economic weakness
So a higher rate does not automatically guarantee currency strength.
What About the Ringgit?
For Malaysian investors, foreign investment returns are ultimately often evaluated relative to:
MYR. A stronger ringgit can reduce the ringgit value of foreign investments. A weaker ringgit can increase it. But the ringgit itself is affected by many economic forces. This is why relying on one forecast such as:
“Ringgit will definitely weaken.”
is not a sound long-term investment strategy.
Portfolio-Level Currency Exposure Matters More Than One Fund
Suppose you own five funds:
US Equity Fund
Global Technology Fund
Global Healthcare Fund
Asia Growth Fund
Global Bond Fund
It may look highly diversified. But underneath, perhaps:
55% of total foreign exposure is effectively USD-related
15% EUR
10% JPY
20% other currencies
Your portfolio may have more USD exposure than you realise. This is why currency analysis should be conducted at the portfolio level.
Don't Count Fund Names—Look Through the Portfolio
Five international funds can still own many of the same securities.
For example:
US Equity Fund
Technology Fund
Global Innovation Fund
may all have large holdings in the same US technology companies.
That creates:
Equity concentration
Sector concentration
Currency concentration
The number of funds is not the same as diversification.
Currency Risk and Asset Allocation
Currency exposure should be considered as part of overall asset allocation. Before selecting an international fund, ask:
How much of my portfolio is overseas?
Which regions?
Which asset classes?
Which currencies?
How much is hedged?
How much is unhedged?
This creates a more complete picture than simply looking at individual fund performance.
Example: Two Investors, Same Global Fund
Suppose both investors buy the same global equity fund. Underlying market return: +10%.
Investor A
Experiences favourable currency movement: +5%.
Simplified ringgit return: 1.10 × 1.05 − 1 ≈ 15.5%.
Investor B
Imagine a different reporting/home currency where currency movement works: −5%.
Simplified return: 1.10 × 0.95 − 1 ≈ 4.5%.
Same underlying investment. Very different home-currency outcome. This illustrates why return must always be viewed from the investor's own currency perspective.
Currency Risk and Fund Performance Tables
When comparing international unit trust performance, check:
Which currency is performance reported in?
Which share class?
Hedged or unhedged?
Does the return shown reflect Malaysian ringgit?
Are distributions included?
A global fund's USD performance may not be the same as the return experienced by an MYR-based investor.
Don't Compare Different Share Classes Carelessly
Suppose a fund offers:
USD class
MYR class
MYR-hedged class
Their performance figures may differ. That does not necessarily mean one fund manager performed better. The differences could partly result from:
Currency conversion
Hedging
Fees
Share-class structure
Always compare like with like.
Currency Risk and Dollar-Cost Averaging
Regular investing can also affect currency exposure.
Suppose you invest: RM1,000 every month into a global fund. When ringgit strengthens, RM1,000 may buy more foreign assets. When ringgit weakens, RM1,000 may buy fewer.
Over time, regular investing can spread the timing of both:
Market entry
Currency conversion
It does not eliminate currency risk, but it avoids relying entirely on one exchange rate at one point in time.
Currency Risk at Withdrawal Matters Too
Investors often focus only on the exchange rate when buying. But the currency at withdrawal also matters. Suppose your overseas portfolio performs well over 15 years. When you finally sell, ringgit has strengthened significantly. The amount you receive in MYR may therefore be lower than expected based solely on foreign-market performance. Currency risk exists throughout the investment journey.
Can You Avoid Currency Risk Completely?
Not easily. Even local investments can have indirect foreign-currency exposure.
For example, Malaysian companies may:
Import raw materials
Export products
Borrow internationally
Earn foreign revenue
Currency movements can affect their profits. So the more realistic objective is not to eliminate all currency exposure. It is to understand and manage it.
A Practical Currency Risk Checklist
If you own overseas unit trusts, ask:
1. What markets does the fund invest in?
US, Europe, Japan, China, global?
2. What is the fund's base or dealing currency?
USD, MYR, SGD or another currency?
3. What currencies are the underlying assets actually exposed to?
Look beyond the fund denomination.
4. Is the share class hedged?
If yes, against which currency?
5. What does hedging cost?
Understand that hedging can affect performance.
6. What percentage of my total portfolio is foreign?
Assess at portfolio level.
7. What are my future spending currencies?
MYR only, or overseas education/retirement needs?
8. Am I making a long-term allocation decision—or a short-term currency bet?
Those are very different strategies.
Common Mistakes Malaysian Investors Make
Mistake 1: Looking Only at Foreign-Market Performance
The Malaysian investor's return can be different after currency translation.
Mistake 2: Assuming a USD Fund Owns Only USD Assets
Fund denomination and underlying currency exposure are different.
Mistake 3: Thinking Currency Risk Is Always Bad
Currency movements can help or hurt.
Mistake 4: Assuming Hedging Is Free
Hedging involves costs and implementation effects.
Mistake 5: Believing Hedged Means Risk-Free
Market risk remains.
Mistake 6: Predicting Currency as the Main Investment Strategy
Short-term FX forecasting is extremely difficult.
Mistake 7: Ignoring Future Spending Currency
Overseas education or retirement can create foreign-currency liabilities.
Mistake 8: Reviewing Funds Individually Instead of Portfolio-Level Exposure
Several funds may create duplicated currency concentration.
Frequently Asked Questions
Can my overseas fund rise while my return in ringgit falls?
Yes. If the underlying investment rises but the relevant foreign currency weakens sufficiently against ringgit, the currency effect can reduce or potentially reverse the investment gain.
Can currency movement improve my return?
Yes. If the relevant foreign currency strengthens against ringgit, it can increase the ringgit value of foreign assets.
What is a currency-hedged fund?
It is a fund or share class that uses permitted hedging techniques to reduce some foreign-exchange exposure.
Is a hedged fund always better?
No. It depends on the asset class, investment goal, hedging costs and portfolio strategy.
Does a USD share class mean all assets are in USD?
No. The underlying portfolio may invest across multiple countries and currencies.
Should Malaysians avoid overseas investments because of currency risk?
No. Overseas investing can provide valuable diversification. Currency is one risk to manage, not necessarily one to eliminate.
A More Advanced Perspective: Currency as Part of Diversification
For a Malaysian investor, holding some foreign assets means part of their wealth is no longer entirely dependent on ringgit.
This can be useful because many other assets may already be Malaysia-linked:
Career income
Property
EPF
Business ownership
Foreign investments may provide both:
Geographic diversification
Currency diversification
But excessive foreign-currency concentration can create its own risks.
The correct level depends on the overall financial plan.
Example: Future Education Liability
Suppose your child will study overseas in 10 years.
Expected cost: USD100,000.
If today: USD1 = RM4.50 the cost is: RM450,000.
If ten years later USD strengthens to: RM5.20 and the tuition cost remained USD100,000, the ringgit requirement becomes: RM520,000.
That is: RM70,000 more purely because of currency movement.
The actual tuition cost may also rise, so the total difference could be greater. This illustrates why future foreign-currency liabilities deserve advance planning.
Example: Malaysian Retirement Liability
Suppose another investor plans to retire entirely in Malaysia. Their future expenses are primarily:
Food
Housing
Healthcare
Transportation
in ringgit.
Holding a very large portion of retirement assets in volatile foreign currencies may therefore create a mismatch between: Investment currency and Spending currency. This does not mean international investment is unsuitable. It means the currency allocation should be intentional.
The Better Question Is Not “Will USD Rise?”
Many investors want to know:
“Should I buy now because USD will strengthen?”
That converts a long-term investment decision into a short-term currency prediction.
A more useful question is:
“What percentage of foreign assets and currencies makes sense for my long-term goals?”
This question is:
More strategic
More controllable
More relevant to financial planning
Conclusion
When Malaysians invest internationally, investment performance is only part of the story.
Your actual return in ringgit can be influenced by:
The performance of the underlying assets
Foreign-exchange movements
Whether exposure is hedged
Hedging costs
The currencies of the underlying investments
This explains why:
An overseas fund can rise while your ringgit return barely increases—or even falls.
It also explains why currency movement can sometimes improve your return.
The deeper lesson is:
International investing creates both asset exposure and currency exposure.
The sophisticated investor therefore does not ask only:
“Will USD go up or down next month?”
Instead, they ask:
“Does my overall foreign-currency exposure make sense relative to my asset allocation, long-term goals and future spending needs?”
That is the difference between speculating on currencies and managing currency risk as part of a diversified investment portfolio.
Disclaimer:
This article is intended for general educational purposes only and does not constitute investment, financial, tax or foreign-exchange advice. Foreign investments are exposed to market and currency risks, and exchange-rate movements may increase or reduce returns. Currency hedging may reduce some exchange-rate exposure but involves costs and does not eliminate investment risk. Investors should review the relevant prospectus, Product Highlights Sheet, share-class details and other disclosure documents and consider their financial objectives, time horizon and risk profile before investing.
Contact Y1Planning for a Global Unit Trust Portfolio Review
Already own several overseas or global unit trust funds?
Y1Planning can help you review:
Global equity exposure
Geographic diversification
Currency concentration
Hedged vs unhedged exposure
Asset allocation
Overlapping fund holdings
Investment time horizon
Future foreign-currency financial goals
Overall portfolio risk
Don't analyse an overseas fund in isolation. Understand how the fund, currency and the rest of your portfolio work together.
Contact YY LIM 012-2311 228 for a professional Global Unit Trust Portfolio Review.
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