Uncorrelated Returns
Currency returns have traditionally exhibited low correlations to many asset classes. Moreover, whereas many other asset classes have become increasingly correlated, the currency asset class has maintained its low correlation over recent periods, highlighted by the two-year data in the chart below. To a large extent, this is because currency valuations may be driven by factors different from those that drive the performance of traditional asset classes. As such, the addition of a currency component may provide valuable portfolio diversification benefits.
Source: Bloomberg
The following indices are used as proxies for the respective asset classes:
All calculations based on daily data to 12/31/2012
Lower Risk
Based on implied measures of volatility, currencies are the least volatile asset class when compared to equities and bonds. There is a popular misconception that the currency asset class is more “risky” than traditional asset classes. However, when no leverage is used, the currency asset class has historically demonstrated lower volatility compared to traditional asset classes, such as equities and fixed income. The Merk Funds typically do not use leverage.
Source: Bloomberg, Merk Investments, Deutsche Bank
The following indices are used as proxies for the respective asset classes:
- Equities - VIX Index: Chicago Board of Options Exchange Volatility Index.
- Fixed Income USSV055 Index: USD Swaption 5 Year Fixed/Floating Volatility Index.
- Currencies - CVIX Index: Deutsche Bank FX Volatility Index
All calculations based on daily data (12/31/2002 - 12/31/2012).
The y-axis represents annualized standard deviation of daily returns.
Market Inefficiencies Possible profit opportunities may arise in the currency market due to its unique structure. As opposed to the stock market, where the vast majority of market participants invest for the specific motivation of making positive investment returns, there are many entities transacting within the currency space whose primary motivation is not to seek a profit.
For example, multi-national corporations may contract to buy or sell certain currencies for the primary reason of hedging against currency risk on future earnings or procurement expenses; governments are active in managing foreign currency reserves; tourists, too, are active currency market participants – even if they are unaware of it. These characteristics may lead to market inefficiencies and profit opportunities in the currency space, unobtainable in traditional markets.
Favorable Risk/Return
Because of its unique attributes, investors may achieve more effective diversification by incorporating alternative investments such as currencies into their portfolios. As an example, the Merk Hard Currency Fund (MERKX), which has the longest track record of all the Merk Funds, compares favorably to other asset classes on a risk/return basis:
Source: Bloomberg, Merk Investments
Information contained herein may discuss Fund performance and holdings. Performance data quoted represents past performance and is no guarantee of future results. Current performance may be lower or higher than the performance data quoted. Investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than original cost. For performance current to the most recent month-end, please visit our website at www.merkfunds.com/fund. Through 03/31/13,the Merk Currency Enhanced U.S. Equity Fund Investor Shares had a 1-year return of +11.09%, and a return of +21.00% since inception on 09/12/2011; the Merk Absolute Return Currency Fund Investor Shares had a 1-year return of -2.03%, a 3-year return of -1.20%, and a return of -1.66% since inception on 09/09/2009; the Merk Asian Currency Fund Investor Shares had a 1-year return of +0.11%, a 3-year return of +0.51%, and a return of -0.36% since inception on 04/01/2008; the Merk Hard Currency Fund Investor Shares had a 1-year return of -0.15%, a 3-year return of +2.40%, a 5-year return of +1.39% and a return of +4.72% since inception on 5/10/2005. All performance figures greater than 1-year are annualized unless otherwise specified. The Investor Share expense ratio of each Fund is 1.30%.
Calculations for period 12/31/2007 - 12/31/2012.
Allocating to Currencies
The latest Merk survey of investment professionals shows the percentage of currencies allocated to client's portfolios as well as how investment professionals classify currencies.
Source: Merk Investments Survey 2012. Survey of 82 RIAs (Registered Investment Advisors) and Intermediaries, ranging from 25mm to over 4 bn in assets under management.
Liquidity
With $4.0 trillion traded daily, versus $945 billion in the US bond market, and $47 billion on the NYSE, the currency market is the largest and most liquid in the world.
Spreads and transaction costs in the currency market are typically lower than in traditional markets. Because of the high liquidity, the currency asset class may be less susceptible to liquidity runs, which have been an issue in other alternative asset classes (such as long-short equity funds).
Source: NYSE Euronext Statistics Archive 2009-2010, Securities Industry and Financial Markets Association (SIFMA) 20, Bank of International Settlements (BIS)Triennial Central Bank Survey 2010
Portfolio Benefits
The chart below illustrate the potential portfolio benefits an allocation to currencies may provide investors. This example uses differing allocations to currencies and to an allocation comprised of equities and fixed income:
Source: Bloomberg, Merk Investments
The following indicies are used as proxies for the respective allocations:
- Equities/Fixed Income: Dow Jones U.S. Moderate Index.
- Currencies: Deutsche Bank Currency Returns (DBCR) Index.
All calculations based on daily data since (12/31/2001 - 12/31/2012).
Currency Returns
The chart below illustrates the returns of currencies relative to the U.S. dollar year-to-date 2012.
CAD: Canadian Dollar, XAU: Spot Gold Price, SEK: Swedish Krona, NOK: Norwegian Krone, GBP: British Pound, EUR: Euro, DKK: Danish Krone, CHF: Swiss Franc, SGD: Singapore Dollar, JPY: Japanese Yen, NZD: New Zealand Dollar, AUD: Australian Dollar
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