Best Foreign-Exchange Mutual Funds Diverge on DollarJoseph Ciolli
The only two actively managed U.S. foreign-exchange mutual funds to turn a profit last year have divided views on how the dollar will perform in 2014, casting doubt on the notion of a market consensus on the greenback.
John Hancock Funds see improving economic growth and increased demand for U.S. assets adding to dollar inflows, while Merk Investments LLC expects continued easing and an accommodative new Federal Reserve chief to lead to a weaker currency. Merk forecasts the dollar will slide to $1.50 per euro in 2014 from $1.3599 today, while Bloomberg’s year-end consensus predicts it will strengthen to $1.28. John Hancock is “marginally more bullish” on the euro versus the dollar.
A delayed slowdown in the Fed’s bond purchases, an unexpectedly strong euro and the highest currency volatility in more than a year resulted in a positive annual return for just two of eight U.S. foreign-exchange mutual funds tracked by Bloomberg. After wrongly calling for the dollar to gain versus the euro last year, Wall Street strategists redoubled the recommendation for 2014.
“We see attraction for dollar-denominated portfolio assets, particularly equities,” Dori Levanoni, a partner at First Quadrant LP/USA in Pasadena, California, and manager of the John Hancock Funds II Currency Strategies Fund, said in a Dec. 31 phone interview. “Economic growth and support for the economy is continuing to strengthen while inflation remains low, which is dollar-supportive.”
The $1.33 billion fund gained 3 percent last year, placing it in the 90th percentile of funds tracked by Bloomberg.
The Bloomberg Dollar Spot Index increased 3.5 percent in 2013 as the greenback reached a five-year high versus the yen on Dec. 18, the date Fed officials announced plans to reduce the central bank’s $85 billion of monthly asset purchases.
U.S. currency mutual funds averaged a negative 2.5 percent return in 2013, compared with a 30 percent gain in the Standard & Poor’s 500 Index and a 3.4 percent drop in U.S. Treasuries. The Parker Index, which tracks returns on foreign-exchange strategies, declined 1.9 percent.
The relative outperformance of the John Hancock currency fund can be traced to bullish calls on the dollar, euro and British pound, as well as a bearish view on the Canadian dollar, according to Levanoni.
The dollar rose 3.4 percent last year against a basket of 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro led all gainers with an 8.2 percent increase, while the pound climbed 5.5 percent. Canada’s dollar fell 4.2 percent.
Managers at the Hancock Funds are long the dollar, euro and pound heading into 2014, and are “modestly” bullish the yen due to oversold pressure, he said. The fund is bearish on the Swedish krona, New Zealand dollar and Canadian dollar. A long position is a bet an asset will rise.
“We continue to see the U.S. economy gain momentum as headwinds, both fiscal and others, reduce,” Levanoni said.
The world’s biggest economy will grow 2.6 percent in 2014, versus 1 percent in the euro area and 2.4 percent in the U.K., according to separate Bloomberg surveys.
Since reaching a three-year high of 3.9 percent in September 2011, inflation has slowed. In October, consumer prices rose 1 percent from a year earlier, the smallest increase in four years, the Labor Department said Nov. 20.
Axel Merk, the founder and president of Palo Alto, California-based Merk Investments, holds the opposite view on the dollar to Levanoni and forecasts a decline in 2014. The $31 million Merk Absolute Return Currency Fund returned 5.8 percent last year, placing it in the 96th percentile.
The Fed is still easing as long as it’s buying bonds, which will continue to dilute the U.S money supply in contrast with a tightening euro-area balance sheet, said Merk. He predicts the dollar will fall to $1.50 per euro some time in 2014, making him more bearish than all 49 forecasters surveyed by Bloomberg.
Since the beginning of May, commercial banks have paid back the equivalent of $235 billion borrowed under the European Central Bank’s Longer-Term Refinancing Operations program, data compiled by Bloomberg show. That helped shrink the central bank’s balance-sheet assets to 2.3 trillion euros ($3.1 trillion), while the Fed’s increased to a record $4 trillion.
“We still have a monetary policy that is very dovish,” Merk said. “We’re almost guaranteed to be behind the curve with tightening, which is not going to be beneficial for the dollar. People have gotten ahead of themselves.”
The euro will do “very well” next year, partially at the expense of the greenback, Merk said. He’s bullish on the pound, which he says may even outperform the 18-nation euro in the short-term. He’s “very negative” on the yen, while also forecasting weakness for the South African rand and Brazilian real due to heightened volatility.
The JPMorgan Chase & Co. Global Volatility Index closed at a three-month high of 8.9 percent yesterday. It reached 11.8 percent on June 24, the most in a year, and averaged 9.1 percent in 2013.
Merk’s $337 million Hard Currency Fund, which invests in short-term money-market instruments and gold, had a negative return of 2.8 percent in 2013, putting it in the 71st percentile of funds tracked by Bloomberg.
Nic Pifer, the head of global fixed-income for Columbia Asset Management Advisors LLC in Minneapolis, is more in line with the broader consensus. He forecasts that the euro will depreciate to $1.30 versus its U.S. peer this year, citing sluggish growth and the possibility of easing by the ECB.
The manager of Columbia’s $53 million Absolute Return Currency and Income Fund forecasts growth of just 0.5 percent to 1 percent in the euro area in 2014. He predicts the dollar will climb by 3 percent to 5 percent this year.
The euro area will “still be a growth laggard in the Group of 10,” Pifer said in a phone interview. “The ECB should be thinking more aggressively about non-standard policy options, which could be euro-negative.”
The Columbia Absolute Return & Income Fund had a negative return of 7.9 percent in 2013, putting it in the fifth percentile, according to Bloomberg data.
The $53 million Samson STRONG Nations Currency Fund, which doesn’t purchase the dollar, euro or pound, missed out on the returns generated by the currencies in 2013. It’s instead betting that the Australian dollar, Norwegian krone and Canadian dollar are oversold and will rebound in 2014, according to fund manager Jonathan Lewis, who also serves as chief investment officer at the New York-based firm.
The fund had a negative return of 6.8 percent last year, placing it in the 11th percentile.
Australia’s dollar was the third-worst major currency in 2013 with a 14 percent decline, while Norway’s krone had the fifth-poorest performance with an 8.3 percent drop.
Officials in both countries made comments about the levels of their respective currencies in the fourth quarter that resulted in further weakness.
Reserve Bank of Australia Governor Glenn Stevens said on Dec. 17 that the board has maintained an “open mind” on whether it needs to cut interest rates further. Norwegian Prime Minister Erna Solberg warned in November that she won’t hesitate to cut spending should a strong krone undermine export competitiveness.
Many foreign-exchange investors lost their way last year by focusing on central-bank and government rhetoric, rather than fundamentals such as economic growth, according to Levanoni of John Hancock Funds.
“With all the noise that policy makers injected into all asset markets in 2013, the normal fundamental driving forces of markets worked -- if you could find them,” he said. “This is a year where it would’ve been better for officials to keep their mouths closed than open.”