By Jim Vrondas

The combination of a lower Aussie dollar and higher US equity markets has seen some sensational returns on international shares over the last 12 months. When you compare the 20% rise in the S&P500 index to a 4.15% in the S&P ASX 200 then it’s no wonder those funds heavily invested in offshore equities are outperforming. The returns look even better at around 35% when you consider a further 15% boost, if unhedged as most of them are, from a lower currency over the same period.

These very impressive returns may be tempting many to cash in after several years of underperformance or simply switch the focus of their investment portfolios to a more domestically focused one.

Depending on where you are in the investment cycle the impact of the lower Aussie dollar will affect you in different ways.

If you made your initial investment 3-5 years ago then this may be just clawing back some of the losses from previous years. Your overall returns may still be negative, neutral or back in the positive and how you feel about these investments into the future may become heavily linked to the historical performance – hard for it not to really.

For others considering an offshore investment they may still be tempted by forecasts of an even lower Aussie dollar over the next 12 months with many analysts predicting a rate closer to 80 cents. If this eventuates then a lower Aussie dollar could add another 10% to the return of the investment.

There is a big temptation to play the currency game and look for currency gains in order to increase investment returns. The focus should however be on the underlying asset and one should not make a decision to invest based on the currency valuation. It is quite a risky proposition to base your investment decision on a forecast because as we know forecasts can and do change as new information comes to knowledge. Besides, when it comes to currency forecasts they can be very unreliable given the many unknown factors that influence exchange rates.

After such a big move in one direction there is always the possibility of a correction in either international equities and/or the Aussie dollar over the next 12 months so investors may be better served focusing on tools or techniques to minimise the risk on their investment.  There are tools such as Forward Exchange Contracts, Options or Futures contracts available to hedge against the currency risk. Depending on a variety factors such as the asset type, the country the investment is located in and the investor's risk profile a hedging structure can be put in place to help.