Calculate how a currency move changes the return on a foreign asset when you measure it in Singapore dollars.
Open your brokerage app and note the one-year return it shows for a fund you hold that is priced in a foreign currency. Then look up the same fund's factsheet and compare its one-year return. The two figures often differ, and the usual reason is the exchange rate.
Farhan holds a world fund priced in US dollars, through a brokerage app that shows values in Singapore dollars. At year end the factsheet says the fund returned 8% in US dollars, while his app shows about 2.6% in Singapore dollars (both invented example figures). He assumes something is wrong with the app or the fees, and spends an evening looking for a charge he cannot find.
Neither the app nor any fee caused the gap. The exchange rate did. For a fund priced in a foreign currency, your Singapore-dollar result depends on the fund's return in its own currency and on that currency's move against the Singapore dollar over the same period. The currency move against the Singapore dollar is the change in how many Singapore dollars one unit of the foreign currency buys over the period.
At the start of Farhan's year, one US dollar cost S$1.35, so his S$10,000 bought about US$7,407 of the fund (10,000 / 1.35). The fund rose 8%, to about US$8,000. Over the same year the US dollar fell 5% against the Singapore dollar, so one US dollar then bought about S$1.2825 (1.35 x 0.95). His US$8,000 converted back to S$10,260 (8,000 x 1.2825), a 2.6% return in Singapore dollars. Farhan found the 5% US dollar move on the MAS website, which publishes exchange rate data, and that explained the gap.
Your return in Singapore dollars is the combined result of the fund's own-currency return and the currency move. You find it by multiplying: (1 + fund return) x (1 + currency move against SGD) - 1. Write the fund's own-currency return as a decimal and add 1, so 8% becomes 1.08. Do the same with the currency move, so minus 5% becomes 0.95. Multiply the two numbers, then subtract 1. For Farhan, 1.08 x 0.95 = 1.026, and 1.026 - 1 = 0.026, which is 2.6%. You can find the currency move for your own funds on the MAS website.
A quick estimate is to add the two percentages instead. For Farhan that gives 8% - 5% = 3%, close to the actual 2.6% but a little high. The estimate works well when both numbers are small and drifts when they are large, so use it only when both are small. The real-return shortcut, nominal return minus inflation, drifts the same way. It is covered in How money works, lesson 4.2, "Real return is roughly the nominal return minus inflation".
The currency effect works both ways. A weaker Singapore dollar adds to foreign returns, and a stronger one reduces them. Now put Farhan's fund through two more made-up years. If the US dollar stays flat against the Singapore dollar, his return is the full 8%. If the US dollar rises 5%, it is 1.08 x 1.05 - 1 = 13.4%. So the same fund, with the same 8% own-currency return, gives three Singapore-dollar results: 2.6%, 8% and 13.4%. A currency move is neither good nor bad in itself. It is a second source of ups and downs on top of the fund's own movements.
For shares, the currency effect can dominate a single year. Over long periods it matters less than people fear, for two reasons. Exchange rates between major currencies tend to swing back and forth rather than move one way forever, so some good and bad years cancel out. Companies in a world index also earn money in many currencies, which spreads the effect further. Currency can still matter over the long run, because one currency can drift against another for many years. Even so, it is usually a smaller part of a share investor's long-term result than share price swings, which can be 30% or more in a bad year.
Bonds are different, and this difference shapes the hedging decision in lesson 5.3, "Hedged share classes: when they help". High-quality bonds are held for steadiness, as lesson 1.2, "What shares, bonds and cash each do in a portfolio", explains. Their own-currency returns are usually modest, but currency moves are not. Say a US dollar bond fund returns 3% in US dollars in a year when the US dollar falls 6% against the Singapore dollar (another invented example). In Singapore dollars that is 1.03 x 0.94 - 1, about minus 3.2%.
A currency swing that would be noise next to a share fund's movements can be larger than a bond fund's whole return. The calm part of the portfolio can then lose money purely because of the exchange rate, and that loss can come in the same year shares are falling. That makes currency a much bigger question for the bond part of a portfolio than for the share part.
Your own three-year table in the activity uses the same multiplication. Write the formula once at the top of the page, and every row becomes a two-second calculation.
Take a USD fund and some made-up figures, and work out your SGD return over three years, using a different currency move each year.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).