Value Added


Low-Risk Ways to Bet Against the Dollar

Steven Goldberg

Templeton Global Bond and Templeton Global Income will profit when the greenback weakens again.



U.S. consumer and government debt levels are at all-time highs, and our economic recovery is sluggish. Many developing nations, by contrast, are growing rapidly and running budget surpluses. Over the long term, the dollar seems bound to weaken, and emerging-markets currencies seem destined to strengthen.

How can you turn that trend into an investment opportunity? I think the best answer is by investing in Templeton Global Bond (symbol TPINX). The fund invests in government bonds and currencies around the world, and manager Michael Hasenstab believes that many emerging-markets currencies are likely to continue to strengthen relative to the greenback.

Since late November, the buck has been bucking the strong downward trend that began last March, when investors began unloading dollars as they regained their appetite for risk. As the recovery in the U.S. has picked up a bit, many investors have concluded that the Federal Reserve Board will raise short-term interest rates around the middle of 2010, a move that may give a boost to the buck. But short-term market moves are always unpredictable. That’s why Hasenstab’s patient approach is so appealing.

Templeton Global Bond’s record is terrific. Over the past ten years through January 4, it returned an annualized 10.7%. That put it in the top 1% among global bond funds, according to Morningstar. What’s more, during Hasenstab’s nine-year tenure as manager, the fund has finished ahead of the average fund in its category every year. And it has produced those high returns with relatively modest risk.

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The fund has one negative -- a 4.25% sales charge for the Class A shares. And annual expenses, at 0.92%, aren’t a bargain, either. But this is a rare case in which do-it-yourself investors might want to hold their noses and pay the load. If you use an adviser, make sure to ask for the adviser share class (TGBAX), which levies no sales commission and charges 0.25 percentage point less in annual fees.

Still another alternative is to buy Templeton Global Income (GIM), a closed-end fund, when it trades at a discount to its net-asset-value per share or at no more than a small premium to NAV. At GIM’s January 4 close price of $9.49, it traded at a 1% premium to NAV.

Hasenstab, 36, is co-director of a team of 40 investment professionals who oversee a total of $50 billion in this fund and other global income funds. The team focuses on evaluating economies and currencies in countries around the world. Templeton Global Bond invests in government bonds and debt issued by government-related entities.

Like many other observers, Hasenstab thinks the recession in the U.S. is over. “The question now is the speed of the recovery,” he says. He believes most countries in developed Europe will lag the U.S. Japan, he says, will the slowest of all to recover. Consequently, the euro and the yen are even less attractive than the dollar.

Many emerging markets -- and some developed nations -- will achieve their normal growth rates by late 2010 or early 2011. And countries that recover more quickly will be “quicker to raise their interest rates,” says Hasenstab.

Australia, Israel and Norway have already hiked rates. Hasenstab expects Brazil, Indonesia, South Korea and the Philippines to tighten their monetary policies in 2010. He predicts that rates in the U.S. and most of the rest of the developed world will remain flat through 2010.

Higher interest rates, of course, attract investors. Global Bond currently yields 4.0% after expenses. By contrast, the ten-year U.S. Treasury Bond yields about 3.75%, and short-term government debt essentially pays nothing.

Hasenstab credits U.S. policymakers with avoiding a second Great Depression. But the U.S. has printed a tremendous amount of money to resuscitate the economy, and that will have consequences. However, Hasenstab says, the danger of a resurgence of inflation is “still three or four years away.”

Likewise, Hasenstab sees little danger of a dollar crash. Conditions in most of developed Europe and Japan are as bad or worse as they are in the U.S., as the recent problems in Greece demonstrate. Emerging-markets currencies will strengthen, “but talk of a dollar crisis is probably overblown,” he says.

The fund takes positions both in bonds and in currencies. Currently, Hasenstab likes South Korean bonds and the nation’s currency, the won. In the past, though, he has owned Korean bonds but hedged out his fund’s exposure to the won.

For now, he’s also bullish on many commodity-producing countries, including Australia, Brazil, Norway and Malaysia. And he’s betting that China’s currency, the renminbi, will become stronger. China has a burgeoning middle class, which could buy foreign imports more cheaply if the renminbi strengthened. China’s policy of keeping its currency artificially pegged to the dollar poses big inflation risks, Hasenstab says.

Investing in government bonds -- even those of emerging nations -- poses much less risk than investing in emerging-markets stocks. Indeed, emerging-markets stocks and bonds have produced almost identical returns over the past decade. But bonds have been about 75% less volatile. Moreover, prices of foreign bonds generally don’t move in sync with U.S. stocks and bonds. That makes this fund a great diversifier.

Steve Goldberg is an investment adviser.



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