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For investment professional use only. Please read important risk disclosure informa3on towards the end of this presenta3on.
May 2013
Merk Currency Investing: Diversification and downside protection
Axel Merk President & CIO Merk Investments
Course of the Dollar?
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Rising Dollar Myth
CAD: Canadian Dollar, SEK: Swedish Krona, NOK: Norwegian Krone, GBP: Bri3sh Pound, EUR: Euro, DKK: Danish Krone, CHF: Swiss Franc, SGD: Singapore Dollar, JPY: Japanese Yen, NZD: New Zealand Dollar, AUD: Australian Dollar
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Gold Drop
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Central Bank Balance Sheets
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Europe Pulling Through
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Draghi’s Burden
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Yen Harakiri
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Currency Wars
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Investment Implica3ons
U.S.!
• Dovish Fed • Dire fiscal outlook?
• Bond market risks
Europe!
• Euro: “not prin3ng”
• Nordic currents
• UK nominal GDP targe3ng?
Asia!
• Yen doomed? • China growth • Benefits for Thailand, Singapore, Malaysia, Taiwan?
Commodity Currencies
• Loonie’s new leader
• Cau3ously op3mis3c on Kiwi
• No to Brazil
Dollar at Risk?
Euro Rock Star 2013?
Currencies may be a great place to deflect “mania” of policy makers.!
China yes! Japan no!
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Go Canada!
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• Low correlation to traditional asset classes
• Low volatility: downside resilience
• Well suited for active management
Happy with the recent run in equities, but concerned about the downside risk? Currencies may help…!
Currencies – Return Diversifiers!
Currencies: Return Diversifiers!
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Investment Implica3ons
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Currency Asset Class
Approaches to Currency Investing!!
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Dollar Index
DBCR
Inverse U.S. Dollar (Inv. DXY) Index: a measure of the inverse value of the United States dollar relative to a basket of foreign currencies including EUR, JPY, GBP, CAD, CHF and SEK. Deutsche Bank Currency Returns (DBCR) Index: an equal-weighted blend of the most widely used investment strategies among active currency managers. It captures long term systematic returns available in the world currency markets.
Directional!!
• Basket of Currencies!• Managed Basket of Currencies!!
!
Non-Directional!!
• Long / Short!• Absolute Return!
Currency Asset Class
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Downside Resilience
Performance in Recent Market Downturns!
Past performance is not indicative of future results. ! ! !Source: Bloomberg, Merk Investments!!Currency Non-Directional: DBCRUSI Index. Currency Directional: Inverse of DXY Index. US Equities: S&P 500 Total Return Index. International Equities: MSCI EAFE Index. It is used as a proxy for the international equity market performance in developed markets outside the U.S. & Canada. !!!
© 2012 Merk Investments, LLC!
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!0.71%'
!11.61%'
!55.25%'
!60.99%'
!2.48%' !3.85%'
!15.27%' !16.04%'
!4.36%'!7.04%'
!17.63%'
!23.67%'
!70.00%'
!60.00%'
!50.00%'
!40.00%'
!30.00%'
!20.00%'
!10.00%'
0.00%'Currency Non-Directional! Currency Directional! US Equities! International Equities!
Crisis' Flash' 2011'Drawdown'
Crisis:! October 9, 2007 – March, 9, 2009!Flash:! April 26, 2010 – July 5, 2010!
2011 Drawdown:! April 26, 2011 – October 3, 2011!
Currencies Non-directional
Currencies Directional
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Low Correla3on
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Large Cap
Small Cap
Int’l Equity
EM Equity
US Bonds
TIPS EM Bonds
Commodities
Real Estate
Hedge Funds
I.DXY DBCR
Large Cap 1.00 0.94 0.51 0.50 -0.34 -0.04 0.36 0.37 0.82 0.55 0.28 0.18
Small Cap 1.00 0.45 0.45 -0.32 -0.06 0.29 0.33 0.86 0.50 0.25 0.18
Int’l Equity 1.00 0.84 -0.15 0.04 0.60 0.49 0.30 0.61 0.56 0.29
EM Equity 1.00 -0.16 0.00 0.62 0.47 0.32 0.64 0.38 0.35
US Bonds 1.00 0.13 0.04 -0.21 -0.26 -0.19 0.01 -0.20
TIPS 1.00 -0.01 0.05 -0.01 0.04 0.08 -0.20
EM Bonds 1.00 0.37 0.22 0.46 0.35 0.10
Commodities 1.00 0.23 0.45 0.47 0.16
Real Estate 1.00 0.30 0.18 0.12
Hedge Funds 1.00 0.30 0.34
Inverse DXY 1.00 0.00
DBCR 1.00 ! !All data as of 12/31/2011. Calculations based on daily data 12/31/2006 – 12/31/2011!
The following indices are used as proxies for the respective asset classes: ! Large Cap Domestic Equity: S&P500 ! !US Bonds: JPM US Bonds ! !Real Estate: FTSE/NAREIT US All REIT! Small Cap Domestic Equity: Russell 2000 ! !TIPS: Barclays US Treasury TIPS! !Hedge Funds: HFRX Global Hedge Fund! International Developed Equity (Int Equity): MSCI EAFE !EM Bonds: JPM EM Bond Index EMBi Global !G10 Currencies: Inverse DXY US Dollar! EM Equity: MSCI Emerging Markets ! !Commodities: DJ Liquid Commodity !DBCR: Deutsche Bank Currency Returns Index!SOURCE: Merk Investments, Bloomberg, Hedge Fund Research (HFR)!
Core Indices! Currencies!Alternatives!
Currencies’ low correla3on to tradi3onal asset classes may provide por^olio diversifica3on benefits.
Low Volatility!
Source: Merk Investments, Bloomberg.!!The following are used as proxy for the asset classes:!- Equities: Chicago Board Options Exchange Market Volatility (VIX) Index measures the market expectations of near-term volatility of S&P 500 index options.!- Currencies: Deutsche Bank Currency Volatility (CVIX) Index measures the currency volatility; weighted average of the implied volatility across 9 major pairs of currencies.!- Fixed Income: USD Swaption 5 Year Fixed/Floating Volatility Index (USSV055).!
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Currencies’ low historic volatility may mitigate downside risks and improve risk-return ratio.!
0%!
10%!
20%!
30%!
40%!
50%!
60%!
70%!
80%!
90%!
Jan-03! Jan-04! Jan-05! Jan-06! Jan-07! Jan-08! Jan-09! Jan-10! Jan-11! Jan-12! Jan-13!
Annu
alize
d St
anda
rd D
evia
tion! Equities!
Fixed Income!
Currencies!
Low Vola3lity
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Por^olio Diversifica3on
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Correlation: 5 year correlation to S&P 500 ! ! !Volatility: 5 year standard deviation of returns!Calculations based on daily data 12/31/2007 – 12/31/2012 ! !SOURCE: Merk Investments, Bloomberg!The following indices are used as proxies for the respective asset classes: !!- Real Estate: FTSE/NAREIT US All REIT, spans the commercial real estate space across the US economy. !!- Currencies: Deutsche Bank Currency Returns (DBCR) Index, an equal-‐weighted blend of the most widely used investment strategies. - Commodities: DJ Liquid Commodity Index, serves as a liquid and diversified benchmark for the commodi3es' asset class. !!- TIPS: Barclays US Treasury TIPS, measures the performance of the US Treasury Infla3on Protected Securi3es ("TIPS") market. ! !!
High
High
Low Correlation to S&P 500
Vola
tility
Commodi3es
TIPS
Real Estate
Currencies
Who is Merk?!
THOUGHT LEADER!
Global Economic Expertise!
Primary source of info for media & investment
pros!
Regular speaker at
conferences!
Original Research!
Insight into major central banks!
Prudent quantitative
modeling!
!
Merk: largest mutual fund manager focused on currencies!
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Who is Merk?
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QUANTITATIVE! QUALITATIVE!• Modeling!• Quant Portfolio Optimization!
• Macro-Economic Research!• Macro, Policy Analytics!
• Financial Analysis!• Portfolio Analytics!
AXEL MERK CHIEF INVESTMENT OFFICER!
WILLIAM POOLE
FINANCIAL ANALYST!
M.Sc. Financial Engineering – Columbia Univ!M.Sc. Applied Math & Econ – ENSAE France!
FINANCIAL ANALYST!
Passed Level III CFA exam!
M.Sc. Financial Engineering – UC Berkeley!
M.Sc. Finance & Econ – Stuttgart
Germany!
FINANCIAL ANALYST!
B.A. Economics – Trinity College!
FINANCIAL ANALYST!
CFA Level III Candidate!
M.Sc. Int’l Affairs Int’l Fin & Policy–
Columbia Univ!B.A. Economics – Shanghai, China !
SR ECONOMIC ADVISER!
Ph.D. Economics!M.B.A.!
University of Chicago!
Former St. Louis Fed President!Former Brown
Economics Chair!
MATTHIEU DOUBLET
DANIEL LUCAS
YUAN FANG
Merk Portfolio Management Team!
NICK REECE
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M.Sc. Computer Science – Brown UniversityB.A. Economics – Brown University!
CFA Level II Candidate!
Merk Por^olio Team
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We strive to invest with discipline while adapting to changing environments.!
Global Research
Qualita3ve and quan3ta3ve analysts • Country analysis • Macro analysis • Proprietary models • Risk modeling
Currency Selec3on
Por^olio team decision making • Research, product & strategy mee3ngs
• Investment objec3ves • Correla3on & akribu3on • Embedded risk management
Security Selec3on
Experts choose securi3es based on • Dura3on • Credit • Liquidity • Structure • Value
Dialogue sharpens arguments • Fed, SIEPR* • Investors • Media
Proprietary Research • Country Profiles • Merk Insights • White Papers Review and Feedback
Merk Funds
Merk Investment Process!
*Stanford Ins3tute for Economic Policy Research
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Merk Investment Process
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Direc3onal Non-‐Direc3onal
How Much to Allocate?!Which Asset Category?!
Source: Merk Investments RIA Survey 2011-2012. Survey of 82 RIAs and Intermediaries, ranging under $50 mm to over $4 bn in assets under management.!
Alloca3ng to Currencies
0%
10%
20%
30%
40%
50%
up to 3% 4%-‐6% 7%-‐9% 10% or greater 0%
10%
20%
30%
40%
50%
short-‐term interna3onal
bond alloca3on
alterna3ve investments alloca3on
interna3onal cash
Other
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Currency Asset Class
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DIVERSIFICATION!
LIQUIDITY!
DOWNSIDE RESILIENCE!
LOW VOLATILITY!
ATTRACTIVE RISK/RETURN!
Generally low correlation to traditional asset classes, which may reduce downside risk.!
Largest, most liquid market.!
Historic performance in market downturns has demonstrated considerable downside resilience.!
Historically lower levels of volatility in comparison to traditional asset classes.!
May generate positive excess returns and lower portfolio’s standard deviation. May provide an inflation hedge to protect purchasing power.!
Disclosure
This presentation was prepared by Merk Investments, LLC. Information presented is for general information purposes only and does not constitute an offer to sell, or a solicitation of an offer to buy, any investment security. The information presented is the current view of the presenter and subject to change without notice. An investment in a strategy described herein has risks, including the risk of losing some or all of the invested capital. Before embarking on a described investment program, an investor should carefully consider the risks and suitability of the described strategy based on their own investment objectives and financial position. Past performance is no guarantee of future results. The information presented may include opinions, projections and other “forward-looking statements.” Due to numerous factors, actual events may differ substantially from those presented. Merk Investments assumes no duty to update any such forward-looking statements or any other information or opinions in this document. Any information and statistical data contained herein derived from third party sources are believed to be reliable, but Merk Investments does not represent that they are accurate, and they should not be relied on as such or be the basis for an investment decision.!
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For investment professional use only. Please read important risk disclosure informa3on towards the end of this presenta3on.
May 2013
Merk Currency Investing: Diversification and downside protection
Axel Merk President & CIO Merk Investments
