During a recent week in Switzerland, the dollar was the topic of many conversations with wealth holders and their family office professionals. To avoid getting burned again, it is critical for each wealth holder to develop standards and protocols to determine which is the “right currency” for his, her, or the family’s use, writes Charles Lowenhaupt.

During a recent week in Switzerland, the dollar was the topic of many conversations with wealth holders and their family office professionals. It is clear that many European investors have been burned by the dollar and find themselves looking elsewhere for currency.  They worry about protectionism and revaluation. They talk about the US taking on debt beyond its means and losing fiscal responsibility. But there is no real sense of what may be an alternative.

So what does it really mean when someone says, “I have been burned by the dollar”? Does it mean that US stocks did poorly because they were traded on the New York exchange rather than London exchange? Or does it mean that US real estate or commodities were poor performers because of their geographical location?

To avoid getting burned again, it is critical for each wealth holder to develop standards and protocols to determine which is the “right currency” for his, her, or the family’s use.

The role of currency

Broadly speaking, currency can have three roles: for spending on a wide variety of living expenses; as a “peg” or benchmark to measure performance; and as an investment vehicle.

Currency is spent for living expenses, travel, and other personal purposes. It is usually required to enter an investment. And it may be necessary for philanthropic purposes. If all of one’s currency needs are in one jurisdiction and one has confidence in the general stability of that currency, the currency of that jurisdiction is just fine for spending purposes. But for the global person, currency must be calibrated to the places where it will be spent, whether the family is living in various jurisdictions, investments are made overseas, or philanthropic donees are global rather than local. If one’s private equity is in France, a call will be in euros. If a Hong Kong resident has a second home in Australia, that person will be spending Australian dollars.

Standards must be set for currency as spending. Each wealth holder must develop processes to analyze when and where the currency will be spent. He or she must also design systems and standards to raise the needed currency over time to minimize any damage caused by currency fluctuations.

Currency is often the peg by which one measures performance – an index tied to a generalized purchasing power. How well are my investments doing relative to a specific currency? Or, how has my earning power increased relative to a currency? To use currency as a measure, the investor need not own it. But as an accurate reflection of purchasing power, one currency alone will not necessarily reflect inflation or the power one has in other jurisdictions. 

Here an example may be useful. I buy Japanese stocks, while my friend buys US stocks. My friend measures performance in yen; I measure performance in dollars. The stock indexes can go up in either case, but I may find my Japanese investments going down in dollars, even as my friend finds his US investments going up more dramatically than a commonly quoted US index. 

It is imperative that a wealth holder consider carefully which currency or currencies will serve as the “peg”.  There can be no universal rule on this matter, since special attention must be given to the jurisdiction which the wealth holder calls “home”, as well as to the jurisdictions which others in the family call “home”. Without that attention, wealth holders are forced into default “pegs” by their financial service providers.

Finally, currency can be seen as an investment. Some private investors have performed brilliantly investing in and hedging currencies. Hedging currency has become commonplace in portfolio management. Many managers have been successful trading in currencies other than the “home” currency of the investors.

Investment in currencies, however, frequently is complicated by the practicalities of buying some of the currencies considered. A “pool” of currencies will be most easily available through ETFs or similar vehicles. Custody of currency is quite difficult in an era where bank stability is not guaranteed. Buying government debt is effective only where the government can issue the currency to repay the debt.

Any wealth management program must have standards to apply to currencies as investment. And issues of custody, security, transparency, and complexity must be considered and resolved as part of that standards-setting process.

In setting standards related to currency, the challenge is always questioning widely held assumptions and natural “gut reactions”. A European patriarch told me: “I have decided to keep a substantial part of my wealth in cash. No matter what happens I want cash available.” He had deposits totaling €100 million in one global bank. “Cash is king,” he said. So is this investment strategy sound? There is a risk that the bank will not be able to deliver. He has children living in the US and Asia, and he has philanthropic and investment commitments in currencies other than the euro. He is setting a goal for comfort’s sake; the strategy he is following – placing cash in one depository – is not sound. The word “cash” has mesmerized him. 

Every wealth holder needs to decide the purposes for which he is considering cash. Without careful consideration, cash as “king” may be an emperor wearing no clothes.

Charles Lowenhaupt is chairman, chief executive officer and president of Lowenhaupt Global Advisors and is a co-founder of the Institute for Wealth Management. He is co-author along with Don Trone of an upcoming book, Freedom From Wealth.