The One Currency Fund That We Recommend

Patricia Oey: Currency funds are difficult to use for the average investor, and many investors get currency exposure by holding international equity funds.

There is only one currency fund Morningstar recommends--Eaton Vance Diversified Currency, which carries a Morningstar Analyst Rating of Bronze. This fund invests in currencies from around the world, but tends to tilt toward the emerging markets. The U.S. dollar is used to purchase foreign currencies, so it is effectively short the U.S. dollar. That means the fund will struggle to perform in a rising dollar environment, which was the case over the last few years. But in 2017, the U.S. dollar has weakened slightly, and many of the fund’s emerging-markets holdings have appreciated against the U.S. dollar, which has resulted in improved performance of the fund.

The team identifies investment ideas by monitoring the economic and political environment of about 120 countries around the world. This includes analysis of changes in fiscal, monetary, and trade policies, and the growth outlook. Risk factors are also evaluated, as is valuation and volatility. Liquidity, as measured by execution costs for the spot market and derivatives, is also considered.

One of the main reasons we like this fund is that it is more diversified, relative to other currency funds. Currently, the fund's largest exposures are the Serbian dinar at 8%, the Sri Lankan rupee at 7%, and Russian ruble at 6%. The remaining 28 currencies each have an allocation of less than 5%. Many funds in the category can have large 15% to 20% allocations in just one currency.

All three share classes of the fund have low fees relative to similar peers, and we also like that the managers have employed the same bottom-up process for the last nine years as co-leads on this fund.