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Home > Funds > Merk Currency Enhanced U.S. Equity Fund > Fund FAQ

Merk Currency Enhanced U.S. Equity Fund: Frequently Asked Questions

Find more answers in the Shareholder FAQ.


What is the objective of the Merk Enhanced Equity Fund?

The Fund seeks to generate total returns that exceed that of the S&P 500 Index by employing an overlay strategy that actively manages the currency exposure associated with the broad U.S. equity markets. The Fund will invest in securities and instruments that provide exposure to both U.S. equities and global currencies.

Why may investors want to consider the Fund?

We believe U.S. investors may be overexposed to the U.S. dollar risk.

Merk Research estimates that approximately 91.1% of U.S. equity portfolio allocations are inherently exposed to the U.S. Dollar. If the value of the Dollar declines against other currencies, investors may be susceptible to a decrease in purchasing power and a lower relative standard of living.

While U.S. multi-national corporations have significant overseas earnings, they typically hedge currency exposures back to U.S. dollars, and hence increase, rather than decrease, the inherent exposure to U.S. dollar risk brought about by an equity investment in U.S. corporations.

How does the Fund seek to meet its objective?

The Fund seeks to meet its objective by implementing a Currency Overlay on top of the S&P 500 Index. This Currency Overlay seeks to provide positive returns from currencies of countries that have liquid currency markets and may increase overall returns relative to the S&P 500 Index.

What is the benefit of adding a Currency Overlay?

You may benefit from a Currency Overlay as it manages the U.S. dollar and other currency risk associated with U.S. equities, and may increase the risk-adjusted returns of an investment in the S&P 500 index. A Currency Overlay may provide added protection from inflation and help protect purchasing power over the longer-term.

How does the Fund fit in an Investment portfolio?

You may want to consider this Fund as a substitute for an allocation to domestic equities. This way you have the desired exposure to U.S. domestic equities, but the benefit of the currency overlay that may enhance the return of the S&P 500 Index.

I earn and spend in dollars, why does it matter that I am “overexposed” to my own currency?

There are many dynamics that may underpin ongoing deterioration in the value of the U.S. dollar, including economic, fiscal, and governmental factors. On a relative basis, weakness in the U.S. dollar may lead to a deterioration in living standards for U.S. investors, and threaten the purchasing power of savings, as it may put upward pressure on inflation. If the U.S. dollar continues to lose value relative to other currencies, the price of imported goods and services is likely to rise. In turn, it becomes evermore costly to sustain present standards of living. So addressing your “overexposure” may be a prudent component of portfolio management. Protecting your future purchasing power may be crucial.

Can the Fund help protect me against inflation?

The Fund’s Currency Overlay may help protect against the ravages of inflation by actively managing the U.S. dollar risk of U.S. equity investments. If the Fed continues its easy money policies, expanding the supply of dollars, and thus putting pressure on the dollar, U.S. purchasing power may be eroded, as evidenced by increased levels of inflation. Moreover, U.S. consumers purchase large quantities of imported goods, so if the value of the U.S. dollar declines, it may cost more to buy those same imported goods. The Fund may help manage this risk to your future spending power.

Don't most S&P 500 companies already practice currency hedging?

Yes, most S&P 500 companies do already practice currency hedging. Unfortunately, from the perspective of an investor wishing to access international currency exposure, it is generally focused on hedging back to the U.S. dollar, and hence increases the U.S. dollar risk inherent in S&P 500 companies. Merk Research estimates that an investment in the S&P 500 aggregate provides only 8.9% international currency exposure and 91.1% U.S. dollar exposure. This fund focuses on managing this U.S. dollar risk inherent in the S&P 500, while maintaining a fully invested position in the S&P 500.

How does the Fund add value if most multi-national organizations don't repatriate their earnings?

While many multi-nationals may not repatriate foreign earnings, foreign earnings are reported in financial statements, as are the profits/losses from economic currency hedging. Because many U.S. corporations hedge anticipated foreign earnings to U.S. dollars, in a weakening U.S. dollar environment, those hedges typically translate into losses, which are in turn reflected in lower reported earnings for that corporation. For those investors concerned about the future of the U.S. dollar, they may wish to diversify away from the U.S. dollar and actively manage the currency risk inherent in their equity holdings. This fund may fulfill these needs.

Does the Fund manage currency risk to correspond with companies and their primary countries of business?

Rather than reverse engineer the proportional currency exposures to reflect the primary countries of business, the Fund will utilize qualitative and quantitative strategies to generate long and short positions in the most liquid currencies of the world. The Fund actively manages currency exposures, taking more tactical long and short positions in a variety of currencies. The Fund will typically invest in, but is not limited to, the following currencies: AUD, CAD, CHF, EUR, GBP, JPY, NOK, NZD, SEK, USD.

Does the Fund offer protection against falling equity prices?

The currency overlay strategy is aimed at generating positive returns irrespective of the direction of the U.S. Dollar; in a falling equity market environment, the currency overlay component of the Fund may provide some downside protection. That said, because the Fund intends to maintain a fully invested position in the S&P 500 Index regardless of the direction of the stock market, it can be reasonably expected that the Fund's returns will be negatively affected in a falling equity market environment.

What is the Fund’s targeted return rate?

The objective of the Fund is to generate returns that exceed that of the S&P 500 Index.