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By Nadia Papagiannis, CFA | 06-09-2011 08:08 AM

Merk: More Hands-On Diversification Required

Investors can't just rely on the traditional paradigms of diversification, argues Merk Funds' Axel Merk.

Nadia Papagiannis: Hello, my name is Nadia Papagiannis. I'm an alternatives investment strategist here at Morningstar.

Today I have with me Axel Merk, manager of the Merk Hard Currency Fund (MERKX) and the Merk Asian Currency Fund (MEAFX), and most recently the Absolute Currency Fund.

Axel, thanks for joining us today.

Axel Merk: Good to be with you.

Papagiannis: Axel, a couple of days ago, Fed Chairman Bernanke in his speech talked about how the slow growth in the United States coupled by trade deficits related to oil is having a negative impact on the U.S. dollar, and similarly yesterday Bill Gross in his speech at the Morningstar conference talked about his negative outlook on the U.S. dollar. What does that mean for investors and how can they hedge their portfolio against this?

Merk: Well, firstly you pointed out that Bernanke talks about the dollar. Remember Greenspan never talked about the dollar. Bernanke, in our view, considers the dollar a monetary policy tool, an environment where the economy doesn't grow, and he's done everything on interest rates and printing money, he actively works on debasing the dollar, in our view.

Now, with regard to the trade deficit, one thing that investors may not be aware of is that in the U.S. we need economic growth to have a strong currency, and that is why a weak dollar is something that Bernanke welcomes a lot.

It is not the same case everywhere else in the world. In Japan, for example, it's the opposite. We have a current account surplus. We have a trade surplus, and we do not have the same sensitivity to the yen as we have in the dollar. In Japan, when you have consumers save more, when you have the economy stall out, when you have an ineffective government that doesn't spend money or doesn't exert pressure on the Bank of Japan, the yen strengthens. So you have the opposite.

And the eurozone, by the way, is just about in between. The current account is about in balance, and as a result the eurozone doesn't need significant economic growth to have a strong currency, and you have to keep those dynamics in mind in a world that's increasingly unstable.

One of the things we have said is that there's no such thing anymore as a safe asset, and investors may want to take a diversified approach to something as mundane as cash, and that means that as in the U.S. where dollar assets may not be as safe as people thought, people may want to take a diversified approach. Central banks diversify to baskets of currencies. We very actively try to address currency risk in portfolios, manage that actively and try to profit from that obviously and taking into account the trade deficit is one of the aspects that we look at.

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