Beware Currency Moves in Overseas Funds
05/27/08 - 10:28 AM EDT
Stan Luxenberg
The move was especially noteworthy because Dodge & Cox has long had a reputation for moving cautiously and avoiding complicated trading strategies.
Partly because it benefitted from currency gains in the past, Dodge & Cox outdid 98% of its competitors during the last five years, according to Morningstar. In contrast, funds that have hedged all along -- and achieved no currency gains -- do not appear impressive in the relative standings. But if the dollar spikes, the hedgers could rocket to the head of the pack. Consider Tweedy, Browne Global Value(TBGVX Quote - Cramer on TBGVX - Stock Picks), a fund that ranks near the bottom of its Morningstar category for performance during the past five years. Tweedy stays hedged as part of its effort to deliver steady results. Most often the fund has succeeded, avoiding big losses in downturns and delivering decent returns in good times. While the hedging policy may prevent the fund from enjoying currency gains, it also protects against losses when the dollar rises. Tweedy settled on the hedging strategy in 1993, when the fund began, because the portfolio managers decided that currencies could be riskier than stocks. Since World War II, the S&P 500 has recorded losses of more than 20% in only two calendar years. In contrast, currencies frequently suffer such big downturns. Tweedy has sought to protect shareholders from all the rough periods. Tweedy contends that currencies move in cycles. For a period of years, the dollar falls, and foreign funds achieve currency gains. Then the dollar rises, and funds give back their currency gains. "Over long periods, exposure to foreign currency does not add anything to returns," says Robert Wyckoff, a portfolio manager of Tweedy, Browne Global Value. The huge majority of foreign funds disagree with the Tweedy approach. Many fund managers argue that the currency moves help portfolios, providing diversification for investors. Sometimes when U.S. stocks are falling, foreign currencies may be climbing. Whether or not the dollar rises this year, both hedged and unhedged foreign funds can make fine holdings. But investors should be aware of the currency positions of their funds -- and understand that moves in the dollar may inflate or depress results.
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