Workin’ for the Yankee dollar? Make the Yankee dollar work for you

Ho Chi Minh City, Vietnam-based Peter Pham wrote recently in Investor’s Digest of Canada that the Greenback’s growing strength shows continued confidence in the American economy. He told readers how the fund he runs reaps dividends from the U.S. dollar. He writes:
“In the portfolio I run — the Prestige Global Growth and Income Fund — all our liquid assets are in U.S. dollars. In fact, 37 per cent of our holdings are cash, all greenbacks. This upsets many people. Such a big pile of cash is a waste, they say. To unlock its true value, such cash must be put to work.

I’d argue otherwise. Holding this amount of cash in the proper currency — in this case, U.S. dollars — not only gives our portfolio a synthetic hedge, but acts as an investment in and of it self. It also gives us an edge in asset allocation.

Moreover, the greenback has historically been safe, as shown by its strength during the market meltdown of 2008.

Dollar takes the lead

Indeed, because the American economy is increasingly showing signs of life, the U.S. dollar has recently been outperforming other major currencies.

True, with cash in U.S. dollars, our portfolio would have no realized or unrealized capital gains. But when compared to funds that are denominated in either Yen or Euros, we can see an obvious margin.

From the start of 2014, the greenback has risen 8.8 per cent against the Euro, 3.2 per cent against the British pound and 2.4 per cent against the Yen. In fact, the dollar recently reached its highest peak since 2008.

Most of our fund’s investments are dollar-denominated. True, we’ve made some investments outside the U.S. But we try to do so indirectly by using an American depositary receipt, or a dollar-denominated exchange-traded fund. This way, we can help relieve the impact of currency translation.

Some examples of these holdings in our fund are PowerShares Chinese Yuan Dim Sum Bond ETF (DSUM–NYSE), Allianz SE (AZSEY–OTCQX), iShares MSCI Hong Kong  (EWH–NYSE), WisdomTree Emerging Markets Equity Income ETF (DEM–NYSE) and Royal Dutch Shell plc (RDS.A–NYSE).

In the meantime, to capitalize on the dollar’s uptrend, we’ve put more than 10 per cent of our fund’s value into another ETF:  PowerShares DB U.S. Dollar Bullish (UUP-NYSE). And although we’ve held the fund for less than a month, it has given us a gain of nearly three per cent, providing a more aggressive way to enhance our portfolio in terms of the greenback.

In terms of asset allocation, there are other upsides to keeping lots of U.S. cash in our portfolio, one being the cushion it provides in the event of a market pullback. And this is what we’ve experienced during the recent sell-off in the S&P 500 Index — a sell-off that’s seen the index lose more than five per cent of its value.

But we managed to weather the storm, given that we outperformed our benchmark, the MSCI World index, by a big margin.

 Moreover, not all our cash is sitting idle, considering that we use 10 per cent of it as a deposit for shorting option contracts. In other words, this cash, seemingly sitting on the sidelines, helps create value for our fund by generating income from options contracts.

Facts prove our point

Our success isn’t a case of dumb luck, but can be proven from the facts on the ground. As the market began melting down in 2008, investors retreated, selling out in exchange for U.S. dollars. And while the meltdown grew even hotter, the greenback rose higher and higher until it hit an all-time high in 2009.

Its strength is evident from the U.S. dollar index which compares the greenback against a weighted basket of six currencies: the Euro, the Yen, the British pound, the loonie, the Swedish Krona and the Swiss franc. And the index shows that during this time, the dollar rose by over 20 per cent to 89 from 72.

This reflects the belief that the American economy has always been and will continue to be seen as a safety net for investors. Not only is the U.S. both resilient and flexible, but it has shown it can take on new economic challenges.

Take the period from the end of the Second World War to the era of globalization. Although these were years of drastic change, the U.S. managed to prevail. Simply put, the U.S. economy is fail-proof. In sum, our strategy of holding U.S. dollars, while focusing on dollar-denominated equities, has paid dividends. It’s also allowed us to reap rewards in terms of asset allocation.”


Investor’s Digest of Canada, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846

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