Diana Strandberg, a portfolio manager with Dodge & Cox International and Dodge & Cox Global, says hedging has allowed the team to mitigate currency risk so they can focus more on individual companies.
Dan Culloton: In 2007--and correct me if I'm wrong--you for the first time put a currency hedge on the portfolio. And that was taken off or dissipated as the value of the dollar changed. Now we're in a period in 2008 where the dollar has weakened again. Has there been any change in your currency hedging policy? And what do you think of the current level of the dollar?
Diana Strandberg: We think about currency first and foremost at the individual company level. And what we're really trying to assess as an owner of a business is where are the revenue and the costs, and where are the assets and the liabilities. To get a sense, as this company is operating, are there potential risks or mismatches that might affect their prospects. From the portfolio level, what grabbed our attention toward the end of 2007 was, as we looked out--and we've been studying currency for quite some time. And we think that over long periods of time, purchasing power parity matters. And what we were starting to see was the dollar--in relation to the euro and the pound in particular--was two standard deviations off of purchasing power parity.
And importantly, that was catching our attention when we were talking about individual companies, in the sense that we like this business located in Italy, but we're not very calm about the euro versus the dollar. And so we decided we would mitigate some of that risk so we could refocus our efforts on individual securities and evaluating them for the portfolio.
Today we continue to look at the dollar in relation to other currencies at the company level. And as we look at currency on a purchasing power parity, that's something that we're studying intently.
