Morningstar Magazine - August/September 2017 - 22

2000

Dispatches
2002
2004

-20
2006

2008

2010

2012

2014

2016

Hedged Vs. Unhedged International Stocks 1-Year Rolling Performance
MSCI ACWI ex US 100% Hedged NR USD (relative to MSCI ACWI Ex USA NR USD)

Relative Return
20
%
10

0

this shift, there is one conversation that is not
happening: How fintech delivers value.
This was the focus of the Fintech Forum held May
24 at Morningstar's offices in New York City.
Attending were Jesse Podell, senior vice president,
ecosystem development and engagement, Citi
FinTech Acceleration; Thomas Jankovich,
principal, Doblin; Malik Yacoubi, entrepreneur,
chief digital officer, Cossette, chairman, X1lab.com;
Victor Pascucci, managing partner, Lightbank;
Rachel Schneider, senior vice president, Center
for Financial Services Innovation; and Rob
Pinkerton, chief marketing officer, Morningstar.

-10
-20
2000

2002

2004

2006

2008

2010

2012

2014

2016

Source: Morningstar.

weakened from 2003 to 2008. Predicting this strength
range. Toward the end of 2016, that fund had 20%
or weakness in advance is extremely difficult
and 25% of its euro and Swiss franc exposures,
Asia
Europe
Canada
Oceania
US
% of fund assets invested in index strategies
to do, especially since the U.S. dollar can remain
respectively, hedged to the U.S. dollar, along with
40
overvalued or undervalued for long periods.
nearly all its China exposure.
However, these extremes tend to mean-revert over
time, as seen when comparing the cumulative
returns of the same two indexes going all the way
back to late 1998, when the hedged index
was launched. Despite large differences at certain
points in the cycle, the long-run performances
of the hedged index versus the unhedged index
are almost identical: $10,000 invested in the
MSCI ACWI ex US and the MSCI ACWI ex US 100%
2007
2008
2009
2010
2011
2012
Hedged indexes at the end of 1998 would have
grown to $23,865.17 and $24,790.28, respectively,
as of May 31.
Despite this, there may be good reasons why
an investor would want to reduce shortterm currency effects. If that is the case, there are
options available. FMI International FMIJX,
with a Morningstar Analyst Rating of Silver, fully
hedges its non-U.S. currency exposure back to the
dollar, for example. The manager prefers to let
stock selection rather than currency fluctuations
drive performance. Gold-rated Dodge & Cox
International Stock DODFX, on the other hand, will
hedge selectively when the managers think a
currency's value has moved far out of its normal

22

Morningstar August/September 2017

30.2
While the short-term performance divergences 30
between the two benchmarks show that
25.6
there is money to be made from strategically
hedging, the pool of investors who have managed20
13.8
to consistently add value here is tiny. Therefore,
if time is on your side, the diversification 12.6
10
benefits of being unhedged (and adding foreign
8.4
currencies to your asset mix) through a market
0
cycle likely outweigh the shorter-term rise
2013
2014
2015
2016
2017
in volatility. Remaining unhedged is also cheaper
and often more tax-efficient.
Tom Whitelaw is director of equity ratings with Morningstar
Research Services' manager research team.

How Fintech Can
Deliver Value
The conversation surrounding financial technology
has shifted from talking about disruption and
defining innovation to drilling down on customer
needs and preferences. While we welcome

Fintech is having an impact on all facets of the
financial-services industry and is now heading into
its next inflection point, as the transformation
brought about by mobile and digital applications
is morphing yet again in the age of platforms
and machine learning. "It's a golden age of fintech,"
Pinkerton said. "Entrepreneurs are filling in
gaps in existing services and starting to use new
analytical tools to uncover new needs."
Fintech is evolving into a phase of innovation in
which addressing customer needs, expectations,
and preferences takes precedence over simply
delivering efficiencies and improvements.
Incumbent financial institutions, which were
slow out of the gate to embrace innovation,
are now equally savvy in accepting these changes.
They have honed the best practices of innovators.
"The financial technology story went from disruption
to collaboration," Jankovich said. "There
is a love affair between incumbents infatuated
with shiny startups and technologies, and startups
in love with incumbents' ability to scale.
Unfortunately, neither is configured to engage.
They are incompatible, and that's the
next evolution."
The success of this first generation of fintech
was measured by the amount of venture
investment in the industry. Venture investment in
fintech reached $17.4 billion in 2016, nearly
an 11% increase over 2015, according to PitchBook.
Investment has been slower in 2017, but is
expected to increase as more mature fintech
firms attract institutional capital.


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Table of Contents for the Digital Edition of Morningstar Magazine - August/September 2017

Contents
Morningstar Magazine - August/September 2017 - Cover1
Morningstar Magazine - August/September 2017 - Cover2
Morningstar Magazine - August/September 2017 - 1
Morningstar Magazine - August/September 2017 - 2
Morningstar Magazine - August/September 2017 - Contents
Morningstar Magazine - August/September 2017 - 4
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Morningstar Magazine - August/September 2017 - Cover3
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Morningstar Magazine - August/September 2017 - Cover1I
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