You will be able to convert a foreign-currency return into SGD and split it into asset return and currency return.
A year ago Marcus bought US$10,000 of a US chip designer, paying S$13,200 at an exchange rate of S$1.32 per US dollar. These are made-up figures for the example. The shares are up 20% in US dollars, so his app shows a holding worth US$12,000 and a fat green number. When he switches the display to Singapore dollars, the green number shrinks.
His colleague asks the obvious question at lunch: did the stock go up 20% or not? It did. But Marcus earns, saves and will one day spend in Singapore dollars, so the number that matters is what the holding did in SGD. That is the third of the four questions from lesson 1.1.
Your return in SGD has two parts: what the asset did in its own currency, and what that currency did against the Singapore dollar. You combine them by multiplying, not adding.
Your SGD return is one plus the asset return, times one plus the currency return, minus one.
Over Marcus's year the US dollar fell from S$1.32 to S$1.25. That is a currency return of 1.25 divided by 1.32, minus one, or about minus 5.3%. His SGD return is 1.20 times 0.947, minus one, which is about 13.6%. Check it in dollars: US$12,000 at S$1.25 is S$15,000, against S$13,200 paid. S$15,000 divided by S$13,200, minus one, is 13.6%.
Add the two percentages instead and you get 14.7%. The gap of about 1.1 points is the cross term: the currency move applied to the gain as well as to the original sum. Investing in US and global markets from Singapore introduced the formula in lesson 2.3, Currency risk is not the same as conversion cost, and said adding is near enough when both moves are small. At analyst depth you never add. The cross term grows with the size of the moves and with time, and a workbook that adds will drift further from your statements every year.
Change one figure. Suppose the stock had risen 3% in US dollars while the dollar fell 6% against the Singapore dollar. Your SGD return is 1.03 times 0.94, minus one: about minus 3.2%. The company did fine, the share price rose, and you are poorer in the currency you spend.
It works the other way too. When the US dollar strengthens, it adds to your SGD return on everything priced in dollars, even holdings whose price didn't move. Module 3 comes back to this in lesson 3.5, The dollar cycle and what a strong dollar does to Asian assets. For now the point is mechanical: the currency part of your return is real, it shows up in your statements, and it can be larger than the asset part in any single year.
Most index factsheets and many fund factsheets quote returns in US dollars. A Singapore option you might compare with, such as an SGD bond fund or an STI ETF, quotes in Singapore dollars. Put them side by side unadjusted and you are comparing two different things.
Here is a made-up factsheet line. A world index fund shows 9% a year over five years in US dollars. Over the same five years, say the US dollar fell 1.5% a year against the Singapore dollar. The SGD figure is 1.09 times 0.985, minus one: about 7.4% a year. Cumulatively that's the difference between a 54% gain and a 43% gain over the five years. Same fund, same years, a different answer for the investor reading it in Singapore.
The tidy way to do this in a spreadsheet is to convert levels, not percentages. Take the index or fund value in US dollars at each date, multiply by the exchange rate at that date, and you have an SGD series. Every return you calculate from that series already includes the currency, cross term and all.
Exchange rates move all day, and different sources quote slightly different rates for the same date. If you use your bank's rate one month, a news site's the next and your broker's after that, small differences pile up and your history stops matching your statements.
Pick one source and keep to it. MAS publishes exchange rate data on its website, which makes it a reasonable default. Use the same type of rate each time, such as a daily closing rate, and the same date convention, such as the last business day of the month. Write both in a note at the top of your workbook.
Two exceptions apply. For your own purchases and sales, use the rate you actually got, because that is the money that left your account, as lesson 7.2 of Investing in US and global markets from Singapore, Track your real return in Singapore dollars, explains. For valuing holdings and benchmarks at month or year ends, use your chosen reference rate. The first records what happened to your cash, and the second keeps your comparisons consistent.
Now take Marcus's split for your own holding. You need the price a year ago and today, in US dollars, and the MAS rate on both dates, so you can show how much of your SGD result came from the company and how much came from the currency.
Restate a US-listed holding's last year in SGD using MAS exchange rate data and split the result into its asset and currency parts.
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