The Currency Asset Class

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:

Lower Risk

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:

All calculations based on daily data (12/31/1990 - 12/31/2009).
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 06/30/2010, the Merk Asian Currency Fund Investor Shares had a 1-year return of -0.57%, and an annualized return of -2.09% since inception on 04/01/2008; through 06/30/2010 the Merk Hard Currency Fund Investor Shares had a 1-year return of +1.76%, a 3-year return of +3.50%, a 5-year return of +5.70% and an annualized return of +4.74% since inception on 5/10/2005. The Investor Share expense ratio of each Fund is 1.30%.

The following indices are used as proxies for the respective asset classes:

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 (12/31/1999 - 12/31/2009).

Liquidity

With $3.2 trillion traded daily, versus $815 billion in the US bond market, and $65 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 2008-2009, Securities Industry and Financial Markets Association (SIFMA) 2009, Bank of International Settlements (BIS)Triennial Central Bank Survey 2007