Dollar Unloved by Bond Managers Enticed by Emerging Markets
Top-performing global bond fund managers are sticking with long-term bets against the U.S. dollar even as the currency has rallied more than 4 percent since the end of last month.
From Bill Gross, who runs the $241 billion Pimco Total Return Fund (PTTRX), to Anthony Norris, whose Wells Fargo Advantage International Bond Fund has $1.8 billion, the investors are convinced that the greenback will lose ground against a range of currencies in emerging markets and selected developed countries such as Australia and Norway.
“The long-term fundamentals still look terrible for the dollar,” said Alessio de Longis, a currency strategist in New York for OppenheimerFunds’ global debt team, including its $13 billion Oppenheimer International Bond Fund.
The dollar may rally from time to time, according to the bearish managers, whose ranks include Daniel Fuss of Loomis Sayles & Co. and Templeton Global Bond Fund’s Michael Hasenstab. They expect overseas markets to lure investors over the next several years with faster economic growth, higher interest rates and healthier government finances than those in the U.S.
“In the currency world, money goes to where it is treated the best,” Thomas Goggins, a manager of the $3 billion John Hancock Strategic Income Fund, said in a telephone interview from Toronto.
The dollar is down 12 percent in the past year against a trade-weighted basket of six currencies, even after a 4.5 percent increase since April 29, when it reached its lowest level in three years. Fund managers at Pacific Investment Management Co., the Newport Beach, California-based firm where Gross is co-chief investment officer, are among the most vocal dollar bears.
‘Revolt’ Against Yields
Investors should “revolt” against Federal Reserve- engineered low interest rates and seek alternatives to U.S. bonds, “including developing/emerging-market debt at higher yields denominated in non-dollar currencies,” Gross said in a commentary this month on the firm’s website.
Pimco Total Return, the world’s largest bond mutual fund, outperformed 98 percent of rivals in the past five years, according to data compiled by Bloomberg. Pimco doesn’t provide details on how the fund’s assets are invested by currency.
While Gross declined to comment, Michael Gomez, a Pimco portfolio manager in Munich who is co-head of the firm’s emerging-markets portfolio team, said that Asian currencies are only part way through a multi-year appreciation against the dollar.
“We think this is a powerful trend,” he said in a telephone interview.
Developing economies in Asia will expand 8.4 percent this year, compared with 2.8 percent growth in the U.S., the International Monetary Fund forecast last month. The yuan has gained 4.92 percent against the dollar in the past year. Most global investors predict the yuan will be convertible into other currencies by 2016, with 50 percent seeing it joining the dollar, yen and euro as a reserve currency within a decade, a May Bloomberg poll indicated.
The Chinese government has become more amenable to letting its currency appreciate as a tool to fight inflation, said Norris, the Wells Fargo manager.
Because their economies are closely linked to China’s, countries including South Korea and Malaysia will be willing to let their currencies climb along with the yuan, he said in a telephone interview from London. His fund topped 90 percent of rivals over the past decade, according to Morningstar.
Down Under Dollars
Fuss of Loomis Sayles is wagering on further gains for the Australian and New Zealand dollars, in part because of their links to growth in Asia.
“They have stuff other people need,” he said in a telephone interview from Boston, referring to commodities exported by the two countries.
Australia has other advantages, said Fuss, who is co- manager with Kathleen Gaffney of the $21 billion Loomis Sayles Bond Fund, which beat 97 of rivals in the past five years, Bloomberg data show.
The country’s benchmark lending rate is 4.75 percent, compared with a range of zero to 0.25 percent in the U.S. Its jobless rate was 4.9 percent in April; the U.S. rate was 9 percent. The ratio of government debt to gross domestic product, a measure of a country’s fiscal health, is 11 percent in Australia compared with 92 percent in the U.S., according to IHS Global Insight, a Lexington, Massachusetts-based research firm.
The Australian dollar climbed 27 percent against the U.S. dollar in the past year, according to Bloomberg data. The New Zealand dollar, a currency Fuss likes even better, gained 18 percent. Now trading at 79.31 cents, the New Zealand dollar will eventually reach parity with the U.S. dollar, Fuss said, without specifying how long that may take.
As early as 1999, Gaffney said the Canadian dollar, then trading at 68 cents, would reach parity with the U.S. dollar. One Canadian dollar now buys $1.02.
Given its steep rise, Fuss said, the Canadian currency is fairly valued at the moment, and he has trimmed his holdings. Loomis Sayles Bond had 9.1 percent of its assets in the Canadian dollar at the end of March, down from 17 percent at the end of September, company data show.
The fund had 30 percent of its assets in non-U.S. currencies, with 4.1 percent in the New Zealand dollar and 3.5 percent in the Norwegian krone.
Hasenstab, the Templeton Global Bond manager at Franklin Resources Inc. (BEN), told shareholders in a 2007 report that “we continued to position the portfolio for a weak U.S. dollar through a basket of Asian currencies.”
The decline of the dollar since then has not changed Hasenstab’s mind. His $55 billion fund had 36 percent of its assets in Asia-Pacific currencies as of Feb. 28, with 15 percent in the won, 11 percent in the Australian dollar and 9.4 percent in the Malaysian ringgit, data from the fund’s semiannual report show. The next largest holdings were the Norwegian krone, 8.3 percent, and the Swedish krona, 8 percent.
Hasenstab declined to comment, Matthew Walsh, a spokesman for San Mateo, California-based Franklin, said in an e-mail.
In an April 29 interview with the “Consuelo Mack WealthTrack” television show, Hasenstab said he envisioned a “bifurcated” future in which the dollar performed well against other developed-market currencies and poorly against the currencies of the emerging markets.
The Templeton Global Bond Fund returned 12 percent a year for the past 10 years, making it the top performing world bond fund, Morningstar data show.
Not all managers are willing to bet against the dollar.
“The dollar-hating trade seems to be a bit crowded,” Luz Padilla, manager of the $165 million DoubleLine Emerging Markets Fixed Income Bond Fund, said in a telephone interview from Los Angeles.
John Taylor, founder of the world’s largest currency-hedge fund, said the rally in higher-yielding assets, including emerging-market currencies, will end by July. The chairman of New York-based FX Concepts LLC, which manages $8.5 billion, made the prediction in a Bloomberg interview this month.
The case for further dollar decline rests on interest rates and government finances, according to de Longis of Oppenheimer Funds.
“The U.S. has worse monetary policy and worse fiscal policy than other countries, and that is a bad combination for the dollar,” said de Longis, whose fund beat 96 percent of peers in the past decade, Morningstar data show.
Fed Chairman Ben S. Bernanke said at his first news conference in April that the economy still requires monetary support. The central bank has kept its overnight lending rate at the same level since December 2008, even as others have raised theirs.
Federal Reserve Bank of St. Louis President James Bullard said in a May 18 Bloomberg interview that the Fed may keep its monetary-policy unchanged until late this year, and that declining inflation expectations have curbed the need to begin withdrawing record stimulus.
“We have a fiscal mess in Washington and both parties seem intransigent,” said Goggins of Hancock, whose fund outperformed 82 percent of peers in the past five years, Bloomberg data show. Failure to make progress shrinking the debt burden, he said, means the U.S. will have to print more dollars, a negative for the currency.
“We are going to have to borrow a ton of money,” Fuss said.
Chances that a bipartisan group of six U.S. senators will agree on a long-range deficit-cutting plan diminished when Republican Senator Tom Coburn of Oklahoma on May 17 abandoned the talks, saying the group was at an impasse over how to cut entitlement programs such as Medicare.
The U.S. dollar may rally later this year, said Norris of Wells Fargo, if American growth picks up and the Fed signals it is ready to start raising interest rates. Economists surveyed by Bloomberg expect the central bank to boost rates in the first quarter of 2012.
“Our long-term thesis remains that the dollar has to decline,” said Norris. “We are long-term dollar bears.”
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