A theme of some of my recent articles has been finding products that help investors build a different kind of portfolio than the typical stocks/bonds/cash mix. Ten years of (very) substandard equity returns are leaving investors seeking out different approaches to portfolio construction.
One interesting view comes from Nassim Nicholas Taleb, author of
The Black Swan: The Impact of the Highly Improbable
. He calls for putting 90% to 95% of your assets into T-bills from various countries and the remainder into very aggressive investments, with the idea being that only a small portion of anyone's portfolio should be exposed to risk.
One way to capitalize, sort of, on this concept is with the
Barclays Asian and Gulf Currency Revaluation ETN
. PGD provides equal weighting to the Saudi riyal, UAE dirham, Hong Kong dollar, Singapore dollar and the Chinese yuan in the hope that one or more of those currencies will be allowed to float freely in the currency market. The Singaporean dollar and the yuan can move but are considered to be managed.
If none of the currencies are unpegged from the dollar, then the price of PGD should not move very much, and that has been the case with the range from high to low since inception only being 4.9%. The political pressure on China and the inflation pressure in Hong Kong and the Middle East create visibility but no certainty for revaluation. If there is no revaluation, PGD won't do much except pay out a T-bill-like yield on a monthly basis.
The biggest risk with PGD might be Barclays Bank. As an ETN, it is a debt obligation of a bank and, because of that, faces similar problems including writedowns, impairments and a capital-raising plan that has caused controversy among shareholders. It may be the structure of the PGD product poses a greater risk than the strategy of the product.
Barclays' fate is far from certain, but I would note that if it were to fail, the Barclays Global Investors unit, or BGI, which does not have to write down anything, would be a highly sought-after asset. It is BGI that manages the ETFs and ETNs. One layer of complexity to this theory is that PGD is actually not a part of BGI. It is one of several ETNs managed by Barclays Capital. In the event of a restructuring, it would not be a surprise to see PGD made a part of BGI.
A thing to watch out for is low trading volume and a small asset base, about $90 million at last check. While not ideal, it would not be difficult for the typical individual investor to execute a trade for a couple hundred shares. One last point on risk to Barclays is that it is very likely that Barclays' fate will be resolved before any of the underlying countries in PGD remove their peg to the U.S. dollar.
Generally speaking, funds like PGD relying on a particular outcome (and do nothing in the mean time), or more broadly, alternative-return products like the
Dover Long Short Sector Fund
, stand to become more important for investors who realize they do not want the volatility that goes with full participation in the stock market or if returns from equities continue to be sub-standard for longer than people expect.
Lastly, I'll add that moderation is important with any product like this. The consequence of PGD somehow trading away from its net asset value because of bankruptcy fears is much less if it only has a 2% portfolio weight as opposed to a 10% weight.
At the time of publication, Nusbaum had no investments in securities mentioned in the article, although positions may change at any time.
Roger Nusbaum is a portfolio manager with Your Source Financial of Phoenix, and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback;
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