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Fund Spy
Is your portfolio prepared for a strong dollar?
Foreign funds that hedge currency are hard to find. With a growing economy and rising interest rates, here are two hedged funds poised to take advantage of a stronger dollar.
By Russel Kinnel, Morningstar
Remember currency hedging? Me neither. It used to be that many foreign funds hedged away their currency risk -- or hedged a fair amount of it. The rather hapless GT Global funds even had a special currency committee that determined firmwide currency hedges. Sure, it didn't achieve much, but those meetings had to rock.
You just don't see many foreign funds hedging these days. One big reason is the euro. When much of Europe adopted a single currency, the need to hedge exposure to the continent's weaker currencies vanished. In any case, the dollar's weakness in recent years has meant that the lack of hedging has been a boon to fund investors. A sluggish economy and falling interest rates have driven money out of the dollar and into stronger currencies. That's also meant that funds that don't hedge may appear to be a little more skilled than they really are.
But maybe that's coming to an end. The economy has picked up, and rising interest rates could make for a strong dollar. At the very least, you can make a good case that the dollar's as likely to go up as down from this point.
If so, that means a level playing field or better for those few funds that hedge away currency exposure. If you already own an unhedged fund, you might want to take a look at a hedged fund as a complement. Today, most of the funds that hedge their currency exposure do so because they're bottom-up stock-pickers who don't like to give a minute of thought to macroeconomic forces. No currency committees here. They're all-hedged all the time.
Here are two of the better hedged foreign-fund offerings that have caught our eye.
- Mutual European (TEMIX): If you invest with a broker, this fund is worth a look. In 1996 value maven Michael Price noticed he was turning up a lot of great values in Europe and this fund was born. It turns out Price's hard-core value strategy works just as well on the other side of the Atlantic. Price bailed out a few years ago, but David Winters and Matthew Haynes have done a great job of finding all sorts of good asset plays to keep the fund chugging.
- Tweedy, Browne Global Value (TBGVX): The past two years have been hard on this former winner of Morningstar's International Stock Manager of the Year award. The fund's hedges have held it back as has the fund's all-cap strategy. Morningstar places the fund in the foreign small/mid-value category where most of the funds are more pure plays on smaller stocks and therefore have been better-positioned to run with the small-cap dominated markets of late. However, markets rotate and the sun will shine on Tweedy's back door again someday.
How not to run a fund-company merger
When Dreyfus bought Founders funds in 1998, Founders was a nice little growth shop. Founders had a number of funds with good performance, but the firm wasn't particularly good at attracting assets and that led to some key manager departures. Dreyfus fixed that. Now Founders is even smaller, and it's had more manager departures and greater difficulty attracting assets.
Star managers Ed Keely and Michael Gerding left early on. (They're now at Janus and Wasatch, respectively.) Last week Robert Ammann left Dreyfus Founders Discovery (FDISX) and Dreyfus Premier Enterprise (DPMGX). Ammann was the last Founders manager who was in place when the deal was completed in 1998.
Consequently, you'd have an awfully tough time arguing that the merger was in the best interests of Founders' fundholders. Unfortunately, most fund-company mergers are a bad affair for fundholders, though it's rare that the acquirer would do so poor a job of retaining talent. From the outside, it's hard to say why Dreyfus has such a poor track record at retaining managers, but one could imagine its reluctance to close small-cap funds in a timely fashion hasn't helped.
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