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Chuck Jaffe
Oct. 30, 2009, 6:28 a.m. EDT · Recommend (2) · Post:
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By Chuck Jaffe, MarketWatch
BOSTON (MarketWatch) -- When it comes to stupid investments, there are no stupid questions. For proof, here are some recent queries from my mailbag:
Question: If you don't like currency funds, then is something like the new Tweedy, Browne Global Value II-Currency Unhedged fund a good idea or a stupid investment? Peter in Richmond, Va.
Answer: Let's be clear about the issue I have with currency funds; last week, my Stupid Investment of the Week was the Morgan Stanley FX Alpha Plus Strategy fund, which has a few very specific fund issues (starting with one of the worst prospectuses I have seen, and going from there).
Felix Zulauf, president of Zulauf Asset Management, says at Barron's Art of Successful Investing Conference that we are in a secular bear market and that the market should peak in 2010. Zulauf argues that emerging markets and basic materials should continue to lead.
Couple the fund-specific issues with the fact that many investors already have currency exposure through ordinary funds, and it's just a bad recipe for a portfolio; few average investors truly need to have a fund specifically to make a play on the falling dollar, when they can make that move by holding funds they understand better and that are more in keeping with their long-term goals rather than short-term market moves. See previous Chuck Jaffe.
One such fund would be the new Tweedy Browne fund /quotes/comstock/10r!tbcux (TBCUX 9.99, -0.05, -0.50%) , but the fact that you are attracted to a new fund because of its "currency unhedged" status is actually a danger sign. Here's why:
The vast majority of foreign stock funds don't even try to hedge their currency exposure; trying to keep it simple and avoid the jargon, the typical foreign stock manager uses foreign currency to buy into foreign companies on a foreign exchange. As a result, whatever happens to the value of those foreign currencies plays out in the fund.
That's good, because if you buy a foreign fund that's unhedged, you get the expected exposure to stocks, and you also diversify your currency risk at the same time.
By comparison -- and, again, keeping things ultra-simplistic -- a fund that hedges the currency attempts to buy foreign stocks in U.S. dollars, either buying American Depository Receipts that trade on a domestic exchange or using other strategies that basically let everything be priced in dollars.
Until recently, if you left out a few oddball funds or small shops, there were only a handful of foreign stock funds that consistently hedge their currency exposure to the dollar. One of those funds was Tweedy Browne Global Value /quotes/comstock/10r!tbgvx (TBGVX 19.80, -0.24, -1.20%) , the original.
So a "currency unhedged" fund is no big deal. Most foreign stock funds already are. It's only a big deal to the folks at Tweedy Browne.
If you like the original, but want the currency exposure, the new fund might be attractive; it's supposed to have the exact same execution except for the currency hedge. If you're just buying it to make a currency play -- especially if you already have currency exposure through other foreign stock and bond funds -- then you got sucked in by the name and are making a bad investment.
Q: If you have a problem with currency funds, do you also have a problem with gold funds for "average investors?" Russell in Boston
A: My issue is less with currency funds -- excepting the Morgan Stanley fund -- and more about the redundancy of the idea. If you already have the currency hedge and you then go out and do it more, you actually throw your portfolio on tilt.
While there are some ordinary funds that have exposure to gold, you don't have the same redundancy. It's not like the average investor can say they have tremendous gold exposure from their large-cap growth stock fund, the way they get the currency exposure from their foreign-stock issue.
In neither case am I making some type of market call. It's more about building a sound portfolio.
For years, the rule of thumb for most investors was to have anywhere from 5% to 10% of their portfolio in gold. That strategy didn't look so great during much of the 1980s and '90s and investors backed away from it. The soundness of that thinking -- having the gold position as a diversifier -- has since attracted plenty of average investors; if they have an exposure to gold as part of a long-term asset allocation strategy -- rather than because they think it's about to pop and they want a quick profit -- that makes sense to me.
Q: You seem to have something against new mutual funds, because you write about a lot of them and don't usually say anything good. Do you have the same problem with new ETFs [exchange-traded funds]?
A: Actually, I find some new funds appealing. You get "new fund phenomenon" with some equity funds, where they tend to have oversized gains while the fund is small and nimble.
Most new funds, however, are a yawn. Unless you have established managers doing what they do best, you just have someone adding to their own product line and hoping you'll buy it sight unseen. Nothing that is being created today is so unique that it isn't already replicated somehow in a whole bunch of existing funds, so why would I buy the newbie until it proves that it can deliver at a level that's higher than the competition?
The same applies to ETFs to a point. If an ETF replicates an existing traditional fund, and an investor prefers the ETF structure, go for it. Moreover, plenty of new ETFs are unique products; they may be leveraged to the hilt, inappropriate for the average investor and unproven, but they're worth looking at because they take a unique approach.
For the ones that don't do something different -- or for the new ETFs that are actively managed, but have no track record or benchmark to get an investor excited -- waiting usually will be prudent. Because of their structure, ETFs really don't get the new fund kick that traditional funds get.
I have yet to find an investor who, on his 65th birthday, says "Darn, I would be able to retire right now if only I had bought that fund when it first came out, instead of waiting two years."
Chuck Jaffe is a senior MarketWatch columnist. His work appears in dozens of U.S. newspapers.
- SavCD | 6:16 a.m. Oct. 30, 2009
Downstream, or refining, operations tell onjly half of Big Oil's story. The other half is upstream, where pressure is building.
4:56 p.m. Oct. 30, 2009 | Comments: 4
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