Local-currency return
What is Local-currency return?
Local-currency return measures an investment's performance in the currency used to price the underlying asset, before translation into the investor's base currency.
Historical series should use adjusted local prices and native distributions before translation, with corporate actions and market calendars aligned. A local return is not automatically the issuer's domestic economic return because revenues, costs, debt, and hedges can be denominated in many currencies.
It should be shown beside base-currency return so users can distinguish asset performance from translation.
Benchmark and portfolio observations require the same local-return methodology, reinvestment assumption, and valuation calendar.
What it isolates
Local return captures price change and, for total return, distributions in the asset's pricing currency. It helps separate underlying market performance from currency translation. The local currency can be the exchange or fund valuation currency, which may differ from the issuer's functional currency and from where its revenues and costs arise.
Calculation
Price return compares adjusted local prices. Total return includes distributions and reinvestment under a stated method. Corporate actions, tax, and fees require consistent treatment. For a multi-country portfolio, local returns can be aggregated with weights before currency effects, but cash flows and changing holdings make simple start-weight calculations only approximate.
From local to base return
Base-currency return compounds local return with change in the asset currency against the portfolio base. If local assets gain 8% while their currency falls 10%, base return is approximately negative 2.8%, not negative 2%. A hedge can offset part of the currency movement while adding carry and cost.
Portfolio interpretation
Strong local equity performance can produce weak investor return after currency depreciation, and the reverse can occur. Comparing managers in local currency can isolate security-market skill, while the actual client experience remains base currency. Global mandates need a clear division between manager-controlled currency positions and structural benchmark exposure.
Practical reporting
State price currency, return type, distribution treatment, fees, tax, and dates. Align local market holidays and stale prices with FX timestamps. Show local, currency, and base contributions that reconcile multiplicatively. Avoid calling local return currency-free because the underlying business and valuation can still respond to exchange rates economically.
Sources and further reading
- Currency Management: An Introduction, CFA Institute