How can a UK resident make small investments in non-pound assets?

Question

I'm a UK resident and citizen, who, to provide a little security in terms of potential future currency fluctuations, would like to hold some assets that are not valued and traded in GBP. Ideally they would be primarily dealt with in another major currency such as USD or EUR.

I'm not particularly interested in buying currency here, unless somebody knows a high-interest dollar/euro savings account that would be open to me.

The investment value being discussed are relatively small - we're considering a low-net worth private investor, investment is expected to be between £1000-£10000. So anything with big flat fees, or only available to wealthier investors would be unhelpful. Ideally I'm looking for a simple to work with, retail "product".

I've seen various investment funds (including available as ISAs) which put some amount in "global stocks and shares" but it's not clear to me how much these are still vulnerable to GBP fluctuations, especially as the non-equity part of such funds seem to typically be in UK bonds/cash/property.

(To be clear, I'm not seeking a recommendation for a particular product, but information on what the product I am looking for might be called, and how/where to find it).

Answer 1

If your question was as simple as moving currency:

When I have wanted to move some of the Sterling cash in my online SIPP & ISA accounts into a foreign currency, I have done it by buying the iShares ERNU and ERN1 ETFs. These hold foreign-currency (USD and EUR respectively) bonds very close (less than one year) to maturity so interest-rate/duration risk is minimised, and the credit quality is acceptable to me as a cash substitute (majority A or better; nothing worse than BBB). Yield on them is miniscule, but the yield wasn't the reason to buy them... it was more about hedging against Sterling volatility.

However, in the comments you write "I'm looking for an investment that would maintain value outside the UK in the event that stuff held in pounds becomes largely worthless elsewhere."

To understand how the value of some asset will change in response to a change in the value of Sterling, you need to understand the basis for that asset having any value at all. For example:

• Foreign bonds paying interest and principal in Dollars, Euros, Yen etc are completely independent of Sterling.
• Foreign companies with a small proportion of their revenues from and assets in the UK shouldn't see much of an impact from Sterling devaluing.
• Even amongst UK companies, I believe the FTSE100 in aggregate derives something like 70% of its revenues from abroad, and the FTSE250 50%. This explains the curious (to some) phenomenon that falls in Sterling are generally positive for the UK indices: it makes those companies foreign earnings more valuable in Sterling terms. See also Mike Scott's answer.
• UK bonds paying interest and principal in Sterling are obviously completely tied to Sterling.

I'd hope it's obvious that if you invest £10000 in a UK fund or ETF specialising in, say, US bonds (unhedged!) and they buy say $13000 worth of assets with that (at 1.3 USD/GBP) and then shortly afterwards the pound crashed to 1-dollar-per-pound, your fundholding should be worth £13000. But if the pound recovered to 1.6 USD/GBP it'd be worth £8125.

Answer 2

I think the product you might be looking for is an ETF - an Exchange Traded Fund.

These funds are traded directly on stock exchanges and seem to be as easy to buy and sell as individual company shares.

ETFs cover a broad range of assets, though each one is usually focussed on one particular asset type, with some covering equity indexes others covering commodities, property etc.

The broad range also means that while some will be GBP denominated others will be in Euro or Dollars or whatever currency makes the most sense for the asset.

Two quick examples:

The iShares Euro Stoxx 50 UCITS ETF. It is bought and sold in Euro and reports in Euro. A quick look at their geographical breakdown suggests it has nothing in the UK and the top holdings are spread across Europe.

The iShares Physical Platinum ETC is bought and sold in US Dollars and reports in USD.

Morningstar has more information on ETFs and a screener at http://www.morningstar.co.uk/uk/etfs/

As a quick aside you can't hold foreign currency in an ISA so any income produced from your assets would be converted by your ISA provider to GBP. It's worth keeping an eye on the rates and charges for those roundtrips if you're planning to reinvest the cash.

Answer 3

The simplest solution is just to buy a FTSE-100 index fund. The companies in the FTSE-100 may be based in the UK, but they are mostly giant multinationals whose profits are mainly earned abroad in other currencies, and so they automatically give you good exposure to other global currencies. That’s why the FTSE-100 tends to go up (in sterling terms) when the pound falls.