PersonalFinance and Health Today

Placing Bets While The Dollar Gets Gussied Up

June 24, 2005Fund Track-->
By CRAIG KARMIN Staff Reporter of THE WALL STREET JOURNAL

Alan Greenspan, chairman of the Federal Reserve, once famously compared the success of forecasting foreign-exchange movements to predicting the outcome of a coin toss. Most mutual-fund companies seem to agree and have steered clear of currency funds.
Now that appears to be changing. Capitalizing on fresh attention to the dollar during its bruising bear market, three companies recently launched funds dedicated to the movement of foreign currencies against the dollar. And more are in the works. For instance, the asset-management unit of Goldman Sachs Group Inc., which manages around $490 billion has proposed launching a currency mutual fund, according to a Securities and Exchange Commission filing.
The new products offer some notable differences from the Franklin Templeton Hard Currency Fund, an actively managed fund that was established in 1989 and had been essentially the only game in town since Fidelity Investments closed down its currencies funds in 1997.
ProFund Advisors and Rydex Investments offer funds that mimic the U.S. Dollar Index, a basket of currencies, and allow investors to bet either on a rising or falling dollar. The Merk Hard Currency Fund, meanwhile, is for investors bearish on the dollar and includes a large position in gold.
What these funds share is the belief that if Mr. Greenspan is right about the futility of predicting currency movements in the short-term, an investor can be more successful over time.
"Over the longer term, you can identify economic imbalances that lead to opportunity," says Michael Hasenstab, a portfolio manager of the Templeton Hard Currency Fund, with $215 million in assets.
In recent years, the Templeton fund has been able to do just that, boasting a five-year cumulative return of 36%, compared with a negative 9.3% for the Standard & Poor's 500-stock index. But Templeton was caught off guard by the strength of the dollar's recent rebound, joining many currency speculators who have lost money this year. So far this year, the fund is down 4.5%, compared with a 0.6% decline for the S&P 500.
Access to some of these funds doesn't come cheap. A $15,000 minimum investment is needed to open a ProFund account directly. But that money can be split among the currency fund and any of ProFund's dozens of other mutual funds. Rydex requires a minimum of $25,000 to open an account with the fund company, though that money can be invested in any of Rydex's nearly 50 mutual funds.
The difficulty of predicting abrupt turns in the foreign-exchange market is one reason Andrew Clark, a senior research analyst at Lipper Inc., thinks currency funds aren't appropriate as a big part of an investor's portfolio. "They're too speculative," he says.
Still, he adds that these sort of funds can be beneficial in small doses to diversify a portfolio. Studies have shown that currency funds have no history of tracking the movements of U.S. and foreign stocks and bonds, or most hedge funds. Mr. Clark notes that currency funds have existed for a while in Europe and Asia and there is no reason why they should be excluded from U.S. portfolios.
Although some analysts say an international bond fund that doesn't hedge its currency position can provide similar diversification, Mr. Clark has his doubts. For one, most funds don't reveal how much they hedge, so the funds' exposure to foreign-currency movements is unclear. Moreover, bond funds respond in large part to interest rates.
"So if interest rates are going up," says Mr. Clark, "the bond fund could fall and undermine any gain from currency movements." The fees for currency funds, he adds, are in line with those of international stock and bond funds, and less than most funds focusing on emerging markets.
Currency funds held little appeal in the late 1990s when the dollar was strong and the stock market was booming. But the dollar began to fall sharply in 2002, tumbling more than 50% at one point against the euro before reclaiming some of that ground this year.
Few people contend that the dollar today looks as overvalued as it did three years ago, and some observers say that betting against the dollar today is chasing yesterday's rally, akin to betting on technology stocks in 1999. But many analysts see this year's dollar rebound as merely a pause in a longer-term bear market. Moreover, two of the fund companies allow investors to bet that the dollar will continue to strengthen.
That is not the case for the Merk Hard Currency Fund, which currently holds just four currencies: the euro, the Swiss franc, the Australian dollar and the British pound. Axel Merk, president of Merk Investments, also keeps 20% of the fund's assets in gold, which typically moves in the opposite direction of the dollar. The fund, launched in May, has only $1 million in assets, but expects to attract more money.
Mr. Merk says that the record U.S. trade deficit will balloon further and over time reassert pressure on the dollar. His fund will hold only currencies from countries that don't regularly intervene to weaken their currency versus the dollar, which means he excludes the Japanese yen as well as most other Asian currencies. This puts him at odds with Templeton's fund, which reasons that because the U.S. trade imbalances are largely with Asia, these currencies are poised for the biggest gains against the dollar.
ProFund Advisors, by contrast, offers investors the choice of betting whether a basket of currencies will rise or fall versus the dollar. While the funds were launched in February at a time when few analysts were predicting a dollar rebound, the Rising U.S. Dollar Fund has attracted assets now worth $82 million, compared with $12 million in the Falling U.S. Dollar Fund.
Rydex Investments' Weakening Dollar Fund, which has attracted around $4 million since its launch last month, and the Strengthening Dollar Fund, with $14 million, employ the same premise but with a twist: The funds offer double the return of the dollar indexes on a daily basis by using derivatives. So if an investor has $1,000 in the fund and the index rises 5% for the day, the investor enjoys a gain of 10%, or in this case $100. But that also means double the losses when the indexes fall.
"When we looked at the volatility of the dollar index relative to stocks and bonds, we saw it was pretty low," explains David Reilly, Rydex's director of portfolio strategy.
Write to Craig Karmin at craig.karmin@wsj.com

posted by MobyGrape @ 7:14 PM