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By Paul Justice, CFA | 04-01-2010 09:19 PM

Return and Correlation in Currency Funds

Merk Funds Axel Merk describes the process behind the fund firm's Hard Currency, Absolute Return, and Asian Currency Fund, and how investors should think about the role of a currency fund in their portfolios.

Paul Justice: I'm Paul Justice with Morningstar, Associate Director of ETF Research. I'm joined by currency guru and macroeconomist Axel Merk. Thank you for being here.

Axel Merk: My pleasure.

Justice: Many investors don't have much experience in currency investing. Some consider it an alternative asset class. And I'd like to inquire with you, of three funds that you have available, how can investors decide to use these funds, and exactly how they differ?

Merk: Sure. We consider currencies an asset class. We believe in the currency space, like in the equity space, you can be a long-term or a short-term investor. You can be a speculator.

And what we do is we are very transparent. We typically do not use leverage. We have three mutual funds. The Hard Currency Fund, seeking to profit from a declining dollar versus a basket of hard currencies. So, if you are long-term negative on the U.S. dollar, if you think that all of the spending we do in the U.S. might have a negative impact on the U.S. dollar, the Hard Currency Fund is something to consider.

Justice: I'm sorry. What would you define hard currency as?

Merk: Hard currencies, in our definition, are currencies backed by sound monetary policy. It's very much a macro approach. It's an approach where we gradually rebalance over an extended period of time. Central bank policy doesn't change overnight. If countries behave better, as far as their central bank policy is concerned, then that's something we consider for inclusion.

Justice: Sure.

Merk: Our second fund is our Asian Currency Fund. The Asian Currency Fund is very much a play on a revaluation in China. We have a substantial Chinese yuan exposure. We believe that the countries that are at what we call is the higher end of the value chain are better equipped to allow the currencies to strengthen. Whereas, the weaker countries, like Vietnam or the Philippines, might engage in potentially competitive devaluation, and, as a result, might not be interested in allowing the currency to appreciate.

Now, a third fund is the Absolute Return Currency Fund. That fund seeks to profit regardless of market conditions. So, again, it's a fund that typically does not use leverage. But there we go a long and short different currencies. It's a more quantitative approach. We rebalance on a monthly basis.

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