Fund Watch


3 New Funds From Proven Managers

Elizabeth Ody

These tested individuals have launched new offerings for investing in currencies, global small caps and emerging markets.



A new mutual fund comes on the scene practically every week. Ninety-nine times out of 100, there’s no reason to give a newbie the slightest nod. But when a skilled and proven manager launches a new fund, you may want to pay attention. Managers get to be extra picky when they’re running a new fund, which typically begins life with few assets. And new portfolios aren’t burdened with old positions that might no longer represent a manager’s best ideas.

The managers who run the three new funds we profile below sport enviable records that should give investors confidence. For now, however, we’re holding back on recommending the third fund because of uncertainty about its strategy.

Riding the tides of exchange rates

The conventional wisdom is that currencies usually don’t have a place in a traditional stock-and-bond portfolio. Exchange rates are too volatile and unpredictable, such wisdom goes. So it’s better to get exposure to foreign currencies by investing in foreign stocks and multinational corporations, which sell their goods and services all over the world.

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Axel Merk thinks such reasoning is misguided. So he launched Merk Absolute Return Currency (symbol MABFX) in September to “make currencies accessible to retail investors,” he says.

Merk’s record is enough to lay to rest the argument that you can’t consistently profit from currency movements. His Merk Hard Currency (MERKX) gained 7.6% annualized from its 2005 inception through October 20, compared with the 2.5% per year gain in an index that tracks the inverse of the dollar’s movements. He earned those gains with a portfolio of gold and money-market securities denominated in foreign currencies. 

But unlike Hard Currency, which explicitly aims to profit from the long-term decline of the dollar, the new fund seeks to profit “regardless of the direction of the dollar,” Merk says. So the new fund holds no gold and gives Merk leeway to use futures contracts to bet on declines in foreign currencies.

Merk employs a model that evaluates currencies through four lenses. Currencies with good upward momentum, such as the Norwegian krone, can make it into the fund. The model also compares purchasing power across different countries to identify over- or undervalued currencies. That approach currently favors the Swedish krona. Trade flows, particularly those related to natural resources, favor the Swiss franc and the Japanese yen but have led Merk to sell short the British pound. And Merk considers the effect of the “carry trade,” or how money flows across borders as investors borrow money in low-yielding countries and invest the proceeds in high-yielding countries. At the end of September, he was bullish on the Australian dollar, in anticipation of an interest-rate hike that was announced in the first week of October, but bearish on the New Zealand dollar. The fund will never employ leverage, Merk says.

So if Merk has launched a dollar-neutral fund, does this mean he’s lightened up regarding the fate of the greenback? “I am still very concerned about the dollar,” he says. But that doesn’t mean you have to be to invest in the new fund.

Uncovering gems all over the world

Some fund managers can happily restrict themselves to investing in one corner of the market, such as mega-size corporations or dirt-cheap companies, but others need a bit more freedom. Robert Gardiner, a longtime manager and analyst at the Wasatch funds, falls into the latter camp. So he is pleased by the flexibility he has in running Wasatch Global Opportunities (WAGOX), which will be one year old in November.

Gardiner compiled a superb record at Wasatch Micro-Cap (WMICX), which he managed or co-managed from the fund’s launch in mid 1995 through the beginning of 2007. During his tenure, the fund returned 25.2% annualized, compared with the Wilshire U.S. Micro Cap index’s 15.7% annualized gain.

But global investing has become Gardiner’s passion. “Every day, the world is getting smaller and more interconnected, and the lines between domestic and international companies are blurring,” he says. So after a two-year break from portfolio-management duties, during which he traveled with Wasatch’s international managers and took on administrative duties, Gardiner persuaded Wasatch to let him custom-design a new fund.

He’s looking for stocks that fit one of three basic theses: high-quality growth companies, good companies that are dirt-cheap because of near-term troubles, and stable mid- and large-size companies. The third category, he explains, will provide some ballast for the racier names he turns up with the first two investment theses (which will mostly be small companies).

 Results look encouraging so far -- since its inception, the fund catapulted 74.5%. That beat the return of MSCI’s global small-cap index by ten percentage points and its all-capitalization index by 30 points. Gardiner says he would welcome a dip in global stock markets -- declines that could open up opportunities among stocks that have gotten too pricey for his liking. But “there’s always something dirt-cheap if you have a global perspective,” he says.

 An emerging-markets entrant

Nicholas Kaiser has delivered wonderful results for investors in Amana Trust Income and Amana Trust Growth, the funds he has managed since 1990 and 1994, respectively. Both funds are leaps and bounds ahead of Standard & Poor’s 500-stock index over the long run, thanks in part to their stellar performance during the recent bear market. Over the past ten years, Amana Trust Income gained 6.4% annualized and Amana Trust Growth returned 7.1% a year, compared with the S&P 500’s flat returns. So it’s no surprise the new Amana Developing World Fund (AMDWX) piqued our interest.

We have full confidence in Kaiser’s abilities, but we hesitate to endorse the new fund because there is some uncertainty as to what the portfolio will look like. The fund’s prospectus defines emerging-markets companies as any that derive at least 50% of revenues or employ at least 50% of staff in developing nations. So obvious names, such as Indian services giant Infosys, are fair game, but so are some less-obvious ones, such as IBM.

The Amana funds invest according to Islamic principles, which prohibit Kaiser from purchasing stock in companies that deal in liquor, gambling or pork processing, as well as companies that lend or borrow significant sums of money (due to a prohibition on interest). So Kaiser expects the fund to maintain a heavy bias toward energy and commodities companies because those sectors tend to hold the greatest number of low-debt companies in emerging markets. At last report the fund held just $1.5 million in assets and 23 stocks, so it’s too soon to see how these different considerations will play out in the portfolio.

Chances are Kaiser will continue to shine in this new venture. But we’d wait to get a better sense of what the new fund will look like before sinking any money into it.



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