The Merk Currency Enhanced U.S. Equity Fund (MUSFX) seeks to generate total returns that exceed that of the S&P 500 Index.
By employing a currency overlay, the Merk Currency Enhanced U.S. Equity Fund actively manages U.S. dollar and other currency risk while concurrently providing investment exposure to the S&P 500.
The Merk Currency Enhanced U.S. Equity Fund (MUSFX) seeks to generate total returns that exceed that of the S&P 500 Index. By employing a currency overlay, the Fund actively manages U.S. dollar and other currency risk while concurrently providing investment exposure to the S&P 500.
Investment Process
Enhanced Equity
In employing a currency overlay to seek a total return exceeding that of the S&P 500, the Fund is focusing on Merk’s core competency, currencies. Rather than picking individual securities, the Fund seeks to enhance investors’ U.S. equity exposure by managing the U.S. dollar and other currency risks.
Manage U.S. Dollar Risk
Fund manages equity exposure to the U.S. dollar and other currencies. Currency Overlay seeks to generate a positive return regardless of the direction of the U.S. dollar. According to our analysis, approximately 90% of U.S. investors’ financial holdings leave them susceptible to risks associated with the U.S. Dollar.2 As many investors may be overly exposed to U.S. dollar risks, active currency management of investors’ U.S. equity exposure may provide valuable diversification benefits.
Manage Inflation Risk
By diversifying outside of the U.S. dollar, the Fund may help protect against inflation and its impact on the real value of an investor’s savings.
Currency Overlay
The Fund actively manages the U.S. dollar and other currency risks associated with investments in the stocks underlying the S&P 500 Index by utilizing a currency overlay. Currency overlay allocations are periodically revised based on both quantitative and qualitative analyses in seeking to achieve positive absolute returns from the fund’s exposure to currencies.
Quantitative Analysis
Absolute Valuation: an analysis of purchasing power differentials across regions. Absolute Momentum: based on a trend following methodology. Absolute Carry: based on an analysis of interest rate differentials. Absolute Resources: based on an analysis of commodities and natural resources, as well as world trade and their impact on currencies.
Risk Overlay
Active management of currency risk employing a minimum variance methodology applied to currencies.
Macro Overlay
Qualitative analysis of monetary policies and economic environments; a country’s perceived political stability; the risk of government intervention in its financial markets; and proprietary analysis on the outlook of a country’s currency.
Unique Opportunities
Market Inefficiencies: Corporate hedging departments, governments and tourists engage in currency transactions without necessarily trying to maximize their currency gains; as a result, professionally managed currency investing may yield profitable results. Non-Directional Approach: The Fund’s currency overlay seeks to generate profits, regardless of the direction of the U.S. dollar. Un-Correlated Returns: Currencies have traditionally exhibited low correlations with other asset classes.
Currency Overlay May Improve Risk Weighted Equity Returns
Over the past 20 years, adding a basic currency overlay to the S&P 500 Index:
Increased Risk Weighted Returns: Both Sharpe and Sortino Ratios increased with the basic currency overlay. Overlay Uncorrelated: The beta of the basic currency overlay versus the S&P 500 is a mere 0.03. Returns Improve: The basic currency overlay increased annualized returns by 3.42%. Volatility Contained: Adding the basic currency overlay resulted in a modest (1.3%) increase in annualized standard deviation of returns over a 20 year time frame. Maximum Drawdown Contained: Adding the basic currency overlay had a minor (<1%) impact on maximum drawdown over a 20 year time frame.
S&P 500 + Currency Overlay: 20 Years
DBCR, the currency overlay employed on top of the S&P 500, is an integration of the most commonly employed currency strategies: carry trade, momentum and valuation. The Deutsche Bank Currency Returns (DBCR) Index, captures long term systematic returns available in the world currency markets.
The Merk Currency Enhanced U.S. Equity Fund’s currency overlay includes proprietary variations of the carry trade, momentum and valuation strategies, as well as a strategy based on commodities and natural resources. The Fund does not try to replicate the combined index performance depicted above.
Sharpe ratio = a measure of risk-adjusted performance. Calculated as follows: (holding period annualized return - holding period annualized risk free rate [3m t-bills]) / (annualized std deviation of returns)
Sortino Ratio = a measure of risk-adjusted performance. Calculated as follows: (holding period annualized return – minimum acceptable return [3m t-bills]) / (downside deviation of returns)
Downside Deviation = annualized standard deviation of returns falling below target minimal acceptable return
Beta = a measure of the volatility, or systemic risk, of a security or portfolio in comparison to the broad market
Max Drawdown = the largest peak to trough decline in investment performance over a specified time period
Annualized Standard Deviation = a measure of dispersion of a set of data from its mean
It is not possible to directly invest in the S&P 500 Index.
The Fund publishes its S&P 500 exposures on a monthly basis. S&P 500 exposures as of April 30, 2012 are shown below:
S&P 500 Exposure3
Percent of Portfolio
SPDR S&P 500 ETF Trust
97.8%
S&P 500 June 2012 Futures E-mini contract
3.1%
The Fund accepts investments in the following minimum amounts:
Minimum Initial Investment
Minimum Additional Investment
Standard Accounts
$2,500
$100
Traditional and
Roth IRA Accounts
$1,000
$100
Currency Overlay4
The Fund publishes its currency allocations on a monthly basis. Currency allocations as of April 30, 2012 are shown below:
Currency
Percent
AUD
22.7%
CAD
17.3%
CHF
8.7%
EUR
17.3%
GBP
-8.8%
JPY
-89.9%
NOK
-1.2%
NZD
2.6%
SEK
28.4%
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Currency symbols: AUD Australian dollar; CAD Canadian dollar; CHF Swiss Franc; EUR euro; GBP British pound; JPY Japanese yen; NOK Norwegian krone; NZD New Zealand dollar; SEK Swedish krona; USD U.S. dollar
*Includes "Acquired Fund Fees and Expenses" that are derived from the Fund's investment in exchange traded funds.
†Source for all currency data: Bloomberg. All performance figures versus U.S. dollar, unless otherwise stated.
2Merk Whitepaper “U.S. Investors Over Exposed to U.S. Dollar Risk?” Published June 2011
3S&P 500 exposure is achieved through the use of S&P500 ETFs and futures; U.S. cash, net is reduced by 3.1% reflecting exposure to S&P 500 futures. Conversely, 3.1% of the S&P 500 exposure is due to futures. All percentages are of total net assets. Holdings are before settlements, if any. A component of U.S. cash, net is 2.4% Citigroup Dollars on Deposit Custody Account.
4The Fund may invest substantially in forward foreign currency contracts or other derivative instruments. The settlement date for all net open forward foreign currency contracts entered into as of April 30, 2012 was 5/23/12. Because delivery and settlement of forward contracts takes place in the future, the Fund will retain the assets it intends to use to settle the contracts and invest these assets in exchange traded products and common stocks that expose the Fund to U.S. equities. The value of such investments (to the extent used to cover the Fund’s net exposure under the forward foreign currency contracts and similar instruments) and forward contracts and other instruments that provide investment exposure to U.S. equities and currencies will be counted for purposes of the Fund’s 80% policy.
As with any mutual fund product, there is no guarantee that the fund will achieve its goals. Investment return and principal value will vary and shares may be worth more or less at redemption than at original purchase; the Fund is not a substitute for a money market fund. Investors should consider the investment objectives, risks and charges and expenses of the Merk Currency Enhanced U.S. Equity Fund carefully before investing. The prospectus contains this and other information about the Merk Currency Enhanced U.S. Equity Fund. To obtain a prospectus, please download it now or call (866) MERK FUND. The prospectus should be read carefully before investing.
The Fund may invest in exchange traded funds (“ETFs”). Like stocks, ETFs are subject to fluctuations in market value, may trade at prices above or below net asset value and are subject to direct, as well as indirect fees and expenses. The Fund also invests in foreign currencies, as such, changes in currency exchange rates will affect the value of what the Fund owns and the price of the Fund’s shares. Investing in foreign instruments bears a greater risk than investing in domestic instruments for reasons such as volatility of currency exchange rates and, in some cases, limited geographic focus and political and economic instability. The Fund may invest in derivative securities which can be volatile and involve various types and degrees of risk. For a more complete discussion of these and other Fund risks, please refer to the Fund’s prospectus.
Fact Sheet
XBRL*
