1. I
n the portfolio I run
— the Prestige Glob-
al Growth and In-
come Fund — all
our liquid assets are in
U.S. dollars.
In fact, 37 per cent of
our holdings are cash, all
greenbacks.
Th is u p se t s m a n y
people. Such a big pile of cash is
a waste, they say. To unlock its
true value, such cash m ust be
put to work.
I’d argue otherwise. Holding
this amount of cash in the proper
currency — in this case, U.S. dol-
lars — not only gives our portfolio
a synthetic hedge, but acts as an
investment in and of itself. It also
gives us an edge in asset allocation.
Moreover, the greenback has
historically been safe, as shown
by its strength during the market
meltdown of 2008.
Dollar takes the lead
Indeed, because the American
economy is increasingly showing
signs oflife, the U.S. dollar has re-
cently been outperforming other
major currencies.
True, with cash in U.S. dollars,
our portfolio would have no real-
ized or unrealized capital gains.
But when compared to funds
that are denominated in either
Yen or Euros, we can see
an obvious margin.
From the start of
2014, the greenback has
risen 8.8 per cent against
the Euro, 3.2 per cent
against the British pound
and 2.4 per cent against
the Yen. In fact, the dol-
lar recently reached its
highest peak since 2008.
Most of our fund’s invest-
ments are dollar-denominated.
True, we’ve made some invest-
ments outside the U.S.
But we try to do so indirectly
by using an American depositary
receipt, or a dollar-denominated
exchange-traded fund. This way,
we can help relieve the impact of
currency translation.
Some examples of these hold-
ings in our fund are PowerShares
Chinese Yuan Dim Sum Bond
ETF (DSUM-NYSE, $24.82), Al-
lianz SE(AZSEY-OTCQX, $17.12),
iShares MSCIHong Kong (EWH-
NYSE, $22.02), WisdomTree
Emerging Markets Equity In-
come ETF (DEM-NYSE, $46.80)
and Royal Dutch Shell plc
(RDS.A-NYSE, $71.37).
In the meantime, to capitalize
on the dollar’s uptrend, we’ve put
more than 10 per cent of our
fund’s value into another ETF:
PowerShares DB U.S. Dollar
Bullish (UUP-NYSE, $23.28).
And although we’ve held the
fund for less than a month, it has
given us a gain of nearly three per
cent, providing a more aggressive
way to enhance our portfolio in
terms of the greenback.
In terms of asset allocation,
there are other upsides to keeping
lots of U.S. cash in our portfolio,
one being the cushion it provides
in the event of a market pullback.
And this is what we’ve experi-
enced during the recent sell-offin
the S&P 500 Index — a sell-off
that’s seen the index lose more
than five per cent of its value.
But we managed to weather
the storm, given that we outper-
formed our benchmark, the MSCI
World index, by a big margin.
Moreover, not all our cash is
sitting idle, considering that we
use 10 per cent of it as a deposit
for shorting option contracts.
In other words, this cash,
seemingly sitting on the sidelines,
helps create value for our fund by
generating income from options
contracts.
Facts prove our point
Our success isn’t a case of
dumb luck, but can be proven
from the facts on the ground. As
the market began melting down in
2008, investors retreated, selling
out in exchange for U.S. dollars.
And while the meltdown grew
even hotter, the greenback rose
higher and higher until it hit an
all-time high in 2009.
Its strength is evident from the
U.S. dollar indexwhich compares
the greenback against a weighted
basket of six currencies: the Euro,
the Yen, the British pound, the
loonie, the Swedish krona and the
Swiss franc.
And the index shows that dur-
ing this time, the dollar rose by
over 20 per cent to 89 from 72.
This reflects the belief that the
American economy has always
been and will continue to be seen
as a safety net for investors.
Not only is the U.S. both re-
silient and flexible, but it has
shown it can take on new eco-
nomic challenges. Take the period
from the end ofthe Second World
War to the era of globalization.
Although these were years of
drastic change, the U.S. managed
to prevail. Simply put, the U.S.
economy is fail-proof. In sum, our
strategy of holding U.S. dollars,
while focusing on dollar-denomi-
nated equities,has paid dividends.
It’s also allowed us to reap rewards
in terms of asset allocation.
Peter Pham , an entrepreneur, is
also an expert on capital m ar-
kets. He’s based in Ho Chi Minh
City in Vietnam .
December 12, 2014 Vol. 46, No. 23
V O T E D T H E W O R L D ’ S B E S T I N V E S T M E N T A D V I S O R Y
Greenback’s growing strength shows continued confidence in American economy
Fund reaps dividends
from U.S. dollar
Peter Pham
© Copyright 2014 by MPL Communications Inc., Reproduced by permission of Investor's Digest of Canada, 133 Richmond St. W., Toronto, ON M5H 3M8
Investor’s Digest of Canada can be found at www.adviceforinvestors.com