Look Past ‘Fading Four’ for Currency Gains, Samson Says

Central-bank reserve shifts indicate the best foreign-exchange returns may be found by avoiding the “fading four” most-traded currencies in favor of the next tier, according to Samson Capital Advisors LLC.

Sweden’s krona and South Korean won, which have rallied 7.1 percent and 3.5 percent against the dollar in the past year, are among Samson’s mutual-fund holdings, which it said may benefit as central banks rebalance portfolios to better match the global economy. Among the most-traded currencies, the yen has weakened 14.2 percent versus the greenback and the pound has fallen 4.4 percent in the past 12 months, while the 17-nation euro has lost 0.3 percent.

“The overweight in central-bank reserves to what we’ll call the fading four, the U.S. dollar, the euro, yen and the pound, those overweights are historical artifacts,” Jonathan Lewis, chief investment officer in New York and a founder of Samson Capital, which oversees $7.3 billion, said March 6 in a telephone interview.

Central-bank holdings denominated in dollars, pounds, euros and yen made up 94.4 percent of the $5.6 trillion of allocated reserves as of 2011, compared with 98.4 percent in 2001, according International Monetary Fund data. The IMF’s central bank claims in other-currencies category rose to $297 billion from $20.1 billion during the decade that ended in 2011.

Market Share

During that period those nations’ share of $70 trillion global economy has contracted to 52 percent from 69.1 percent, World Bank data show.

The IMF said in November that it’s considering classifying the Australian and the Canadian dollars as reserve currencies.

Samson’s STRONG Nations Currency Fund was about evenly split between the Swedish krona, Norwegian Krone, South Korean Won, Czech koruna, Chilean peso and the New Zealand, Canadian, Australian, Taiwanese and Singapore dollars, with about 9 percent holdings in each, as of Jan. 31. The $49 million mutual fund, created in August, also has a 3.1 percent position in U.S. dollars and 6.2 percent of its holdings in gold.

The fund has lost 1.6 percent this year and trails 87 percent of its peers, according to data compiled by Bloomberg, which uses global debt funds as a benchmark. The Samson fund’s performance compares with a 1.69 percent loss for the Bank of America Merrill Lynch USD LIBOR 3 Month CM index, according to Morningstar, which uses that measure as a benchmark for the fund.

Market Methods

“People are looking for an accessible way to play currencies,” Noel Hebert, chief investment officer at Bethlehem, Pennsylvania-based Concannon Wealth Management LLC, which oversees about $250 million, said March 6 in a telephone interview. “I don’t think you’ve got a perfect capture of where the strong growth is really happening. You’re still going to see a lot of growth away from those countries.”

Lewis said the actively managed fund looks for currencies of nations that have sustainable fiscal trends, transparent economic data, sound rule of law and democratic governance and an open, healthy economy with freer exchange rates. These currencies “are the higher probability victors in that currency reallocation” by central banks, Lewis said.

Samson also uses benchmarks in its assessments, including The Heritage Foundation’s Economic Freedom indexes and the World Bank’s Worldwide Governance Indicators.

Selection Criteria

Canada’s dollar rose 7.1 percent on the Heritage Foundation’s index during the decade through 2012. Its currency, included in Samson’s portfolio, has gained 37 percent against the U.S. dollar during that span.

“Talk about the fading four again, there would have been a time, decades ago, when they were the strong nations,” Lewis said. “It’s just that central-bank policy, government policy, is taking its sweet time catching up with the reality of how the world economies have changed.”

The fund rules out the yen amid speculation that Prime Minister Shinzo Abe’s December election increases the likelihood the country will drive down its currency. Japan’s has weakened 18 percent in the past six months, according to Bloomberg Correlation-Weighted Indexes.

The outlooks for the Swiss franc and Brazil’s real are also clouded by central-bank policies and currency-market intervention.

Central Banks

The Swiss National Bank is maintaining a currency ceiling at 1.20 francs per euro in an attempt to protect its economy from a stronger franc. The central bank bought 188 billion francs ($199 billion) in foreign currencies from a wide range of counterparties in Switzerland and abroad, the Zurich-based central bank said in its Accountability Report today.

Brazil’s central bank has cut interest rates 5.25 percentage points since August 2011, the most among Group of 20 nations, while Finance Minister Guido Mantega has said that he is abandoning efforts to push down the real.

“Brazil has been a habitual capital-control freak,” Lewis said. “They score very poorly on governance and accountability, and their index-of-freedom scores are not terribly impressive. We look at the total picture.”

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