While the spot currency return was -1.6% annually over the 10-year period ending April 2015, when interest income is included in forward contracts, an index of Brazil currency and interest rates returned a positive 8.8% percentage points annually over the same 10 years.
Equity-Like Returns with Less Volatility
The long-term data show that investing in a Brazilian real currency strategy provides comparable returns to investing in Brazilian equities—but with markedly less volatility. To U.S. investors, the majority of these returns came from the currency, while the volatility came from both the currency and the stocks themselves.
As shown in figure 2, by eliminating the equity portion of the equation and investing in a fully collateralized portfolio of Brazilian real forwards, an investor can capture almost all of the returns of investing in the equities with less than half of the volatility. The Sharpe ratio, or risk-adjusted returns, of this proposition seems to favor investment in the real as a vehicle for Brazilian exposure.
Annualized Total Return (April 30, 2005 – April 30, 2015)
For definitions of terms in the chart, please visit our glossary.
History suggests that the Brazilian real offers a compelling risk-adjusted return profile for investors who are looking for exposure to non-U.S.-dollar-denominated assets.
1Source: Banco Central do Brasil, 4/29/15.
2Source: Bloomberg, 4/30/15.
3Source: Bloomberg, 4/30/15.
4Source: Bloomberg, 5/18/15.
5Source: Bloomberg, 4/30/15.
Important Risks Related to this Article
Investments focused in Brazil increase the impact of events and developments associated with the region, which can adversely affect performance.