I am a strong believer that currencies have a place in all portfolios, and I have struggled to find the best way to incorporate them into the Protected Principal Retirement Portfolio.
Since we all like diversification, I do not favor individual currencies, but rather a basket of those best positioned to take advantage of the changing world economy. This kind of takes me out of forex, since one must generally focus on individual currencies, and a small slip up could be quite costly.
My research into currency investing has recently focused on closed-end funds (CEFs), ETFs, ETNs and even to a mutual fund family.
Insofar as CEFs go, the strongest currency-like alternative is Nuveen's Diversified Currency Opportunities Fund (NYSE:JGT). I have discussed this fund on two previous occasions (here) and (here), so, that being said I will skip on to our other currency alternatives.
iPath Optimized Currency Carry ETN (NYSEARCA:ICI)
This fund tries to duplicate the Barclays Intelligent Carry Index. I have finally begun to understand the term "carry trade." Oversimplified, it means "sell a currency with a low interest rate and use these funds to purchase a currency yielding a higher interest rate" (courtesy of Investopedia).
It invests primarily in the G-10 currencies, has an expense ratio of 0.65 percent and is presently trading around $47/share. Year-to-date ICI has returned 2.64 percent, and for the trailing 12 months, the return has been 4.42 percent. It does not presently pay a dividend.
Over its history. ICI has fluctuated between a high price of $51/share and a low of $43/share.
Most recently ICI was long the Norwegian, Australian, New Zealand and U.S. dollar, and short the Great Britain pound, Japanese yen, Canadian dollar, Swedish krona, Swiss franc and Euro.
PowerShares DB G10 Currency Harvest ETF (NYSEARCA:DBV)
DBV also uses the "carry trade" as its investment strategy and primarily tracks the Deutsche Bank G10 currency futures.
Presently trading around $27.50, DBV has returned 5.2 percent year-to-date and a sizable 12.1 percent for the trailing 12 month period. It has a modest expense ratio of 0.80 percent.
Through 2008, DBV paid a small dividend, which has not to my knowledge been resumed to date.
Over the years since its inception, DBV has traded between a high of $30/share and a low of $19/share, and, if one uses charts, it is in a clear uptrend.
As of the beginning of this May, the fund was primarily long the Australian dollar, the Norwegian krone and the New Zealand dollar and short the Euro, the Japanese yen and the Swiss franc.
Merk Currency Enhanced U.S. Equity Fund (MUSFX)
I am not at all enamored with mutual funds, and it is rare that I even look at most of them. However, about a year ago I read a book written by Axel Merk entitled: "Sustainable Wealth". Merk explains in depth many of the principles that I have alluded to in prior articles on SA, and has a good discussion of currency investing in the book. I highly recommend it for investors of any age.
After completing the book I discovered that Merk manages four mutual funds - each of which focuses on a different type of currency investment. If you are interested, the link to his fund website is (here).
The four Merk funds are:
- Merk Asian Currency Fund (MEAFX)
- Merk Absolute Return Currency Fund (MABFX)
- Merk Hard Currency Fund (MERKX)
- Merk Currency Enhanced U.S. Equity Fund (MUSFX)
The fourth fund (MUSFX) has caught my attention, and I have spent considerable time looking into it. The following is a summary of the fund's investment strategy and how it has performed since its inception in September 2011.
The fund has as its overall objective to combine investments in U.S. equities with exposure to currencies in order to enhance total return. The minimum investment is $2,500 ($1,000 in an IRA). It carries an expense ratio of 1.38 percent.
I am providing a link to information on this fund (here).
The annual yield on dividends paid is just above one percent.
My interest in this fund is a defensive one based upon the opportunity to participate in investments in a variety of different currency overlays which are designed to manage U.S. dollar (and other currency) risk levels.
According to the fund fact sheet (which you can download on the Merk Fund website), MUSFX has returned 34.40 percent since inception in September 2011 (21.00 percent annualized). As of March 31, 2013, the fund has returned almost eight percent year-to-date.
The fund invests primarily in S&P 500 stocks and uses the Deutsche Bank Currency Return Index (DBCR) atop the S&P 500 which, over time adds about 3.42 percent to annualized returns. The DBCR employs a combination of several currency strategies including: carry trade, momentum and valuation.
This strategy also tends to mitigate volatility and has a beta of 0.03.
The present net asset value for MUSFX is $13.43. Morningstar categorizes MUSFX as a "Large Blend" fund, and since it has no significant track record they do not rate it.
I would rate its portfolio as well-diversified.
My primary concern with these currency plays is that most have yet to be tested by a complete bear market cycle.
While I have not as yet come to a decision relative to taking a position in a currency investment, I know that when we opt to include one (or more) in the Protected Principal Retirement portfolio, it will not occupy more than a five percent position.
Of those discussed in this article (and JGT), I currently favor JGT and MUSFX, particularly since JGT sells at a discount and carries over a nine percent yield, and MUSFX has had such good price performance since its inception.
Of the two exchange traded vehicles I am going to look further into DBV and a possible position.
I believe that currencies definitely have a place, and those covered in this article have merit for further research by those of us with an interest in including a currency investment alternative as part of our portfolios.
Additional disclosure: This article does not constitute either a buy or sell recommendation for any of the funds discussed.