How currency fluctuations hit investors in foreign funds
Q: If I buy a mutual fund that is stacked with overseas firms, how big a factor is the value fluctuation of the currency in those firms' home countries? Is my investment pegged to the dollar whatever their currency does?
N.P., Jamaica Plain, Mass.
A: The currency implications of funds with foreign companies can add up to a real can of worms when it comes to sorting through your potential gains and losses. When you buy foreign funds, you should buy either a fund that is totally hedged against currency fluctuations (such as Tweedy Brown Global Value Fund) or one that is unhedged (such as T. Rowe Price International Stock Fund), says William Rocco, who tracks international funds for information firm Morningstar Inc., in Chicago.
If you are buying into the funds intending to make gains through shifts in currencies, the choice between hedged and unhedged funds depends on your investing horizon and how you believe the dollar will fare. An unhedged fund can give you an edge during a period when the US dollar is falling in value, as is now the case, Mr. Rocco says. A hedged fund would be advantageous when the dollar is strong, because you will have locked in that dollar's buying power.
Funds that use blending techniques (being both hedged and unhedged), tend not to perform well over time, he says.
Finally, it is usually better to buy funds based on the prospects of the companies involved, not because of potential changes in currency values by themselves, Rocco says.
Information on a fund's hedging strategies can be found in the prospectus.
Q: My mother passed away several years ago and designated in her will that a piece of real estate she owned be sold and the money put into a trust. No other assets are in the trust, which is for her grandchildren. When is the capital-gains tax incurred, and by whom?
R.R., Port Angeles, Wash.
A: According to an information officer for the IRS, refer to Form 1041, the return for estates and trusts, and Publication 559, which provides guidelines for executors and administrators. The tax would be filed by the executor for the tax year in which a capital gain was incurred. If you need additional information, call the IRS at 800-829-1040.