Dr. Hong Chun-uk suggested that a portfolio strategy utilizing the safety and diversification benefits of dollar assets is crucial in a volatile exchange rate market.
The first advantage of the dollar is its characteristic as a safe haven asset whose value rises during economic crises, and the second is its function of diversifying asset portfolios to distribute risk. This remains valid even in the current situation where the exchange rate stays around 1,300 won, contrary to predictions that it would rise to 1,600 or 1,700 won.
Dollar investment does not guarantee good performance unconditionally, having recorded sluggish investment performance by forming a sideways market for about 10 years from 2000 to 2009.
However, from 2009 to 2026, it recorded a strong bull market, rising about 8-fold, and after the financial crisis, dollar assets showed an upward trend during the recovery process.
This portfolio consists of US stocks (S&P500), US bonds, Nasdaq (representative tech stocks), dollar futures, and high-yield bonds.
High-yield bonds are classified as speculative grade (BB or lower) by US standards, but in the Korean market, they are often classified as investment grade. These bonds offer high interest income with issuance rates of 6-8%.
By investing in various overseas assets such as US-listed global REITs (VNQ) or infrastructure funds, investors can effectively broaden their investment horizons.
Dollar investment is not a panacea, and a maximum drawdown (MDD) can occur. Around the Enron scandal in 2003, a drawdown of about -30% was recorded.
Significant shocks can occur if foreign exchange market volatility or structural problems, such as a global financial crisis, arise. Therefore, a balanced asset allocation, combining dollar assets appropriately with Korean won assets, is necessary rather than concentrating solely on dollar assets.
Currency hedging transactions entail two main problems. First, they incur costs; if US interest rates are higher than Korea's, regular costs of over 1-2% per year arise.
Second, it nullifies the dollar's protective function as a safe haven during crises. This can hinder the original goals of portfolio stability and expanding investment horizons by attempting to fix exchange rate fluctuations.
Currency-hedged (H) products have the advantage of fixing exchange rate fluctuations, but they come with several problems. When engaging in currency hedging transactions, if US interest rates are higher than Korea's, costs of over 1-2% per year arise.
Furthermore, if currency hedging is applied, the benefit of protecting returns through dollar strength during an economic crisis disappears. This undermines the original goals of dollar investment, which are portfolio stability and expanding investment horizons.
Dr. Hong Chun-uk believed that currency-exposed investments are more favorable for long-term portfolio performance than currency-hedged products, which have an 'H' next to their ETF name.
While it is acknowledged that the advisability of currency hedging can change with financial environment shifts, from a portfolio construction perspective, it is preferable not to hedge.
Maintaining a certain proportion of dollar assets is expected to help improve long-term investment performance.
Answers come from the transcript, with the exact spot cited.
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