Dollar Daze: Investing With a Weak Currency
Greenback's Slide Prompts
Many to Seek Foreign Refuge;
Still Vulnerable to Bad Picks
By JEFF D. OPDYKE and JANE J. KIM
September 26, 2007; Page D1
Even if you never travel abroad, never buy a foreign car and invest only in American stocks, the falling dollar is potentially a problem for your investments.
That's prompting investors to put more money into non-dollar-denominated assets. International stock funds saw net inflows of investors' cash in the past two weeks, after posting net outflows since the beginning of August, according to AMG Data Services. Meanwhile, U.S. stock funds have had net outflows so far this month.
The dollar yesterday dropped to a record low against the euro and has hit multiyear lows against other major currencies, after the Federal Reserve cut short-term interest rates last week. The latest tumble continues a downdraft that started in 2002 and that many currency experts say still has more years remaining, due largely to concerns about a slowing U.S. economy and a yawning trade deficit. Economists at Standard & Poor's project the dollar will continue to fall through 2009 and then stay flat through 2011.
"I'm getting a lot of calls from people asking me if it's too late to get out of the U.S. dollar, and I'm telling them, 'No, it's not too late,' " says Peter Schiff, president of Euro Pacific Capital Inc., a broker-dealer specializing in foreign stocks.
Canada's dollar approaches parity with the U.S. dollar at a Montreal currency exchange office last week.
A weaker dollar has broad effects. It can raise the price of many of the imported goods we buy, from crude oil to Chilean fruit to Japanese DVD players, though some currencies, including the Chinese yuan, are closely tied or pegged to the dollar, and import prices from those countries are little affected. And when foreign goods become more expensive, U.S. producers often feel freer to raise their prices and still remain competitive. Thus, even if your U.S. stocks perform well, the value of the dollars they generate may struggle to keep pace with the inflation you feel in your pocketbook.
"What counts is what the dollar buys, not how much you have," Mr. Schiff says.
That has investors like Carina Grasso remaking their portfolios. The 48-year-old chiropractor from Celebration, Fla., last week pulled money from U.S. mutual funds and bank accounts, and borrowed against a life-insurance policy, to invest overseas. She even took out a mortgage on a rental home to invest abroad. Ms. Grasso says that while she understands that foreign investing can expose her to market volatility, "I'm already dealing with volatility at home. Now I have to deal with the decline in valuation? To me, the devaluation of the dollar is a certainty."
One risk to investing overseas is that the dollar could reverse course. Though many now expect the dollar to fall further, predicting long-range currency movements can be like predicting long-term weather patterns. "Such predictions have made fools of central bankers, so I don't think a mere mortal like me would be able to consistently get this right," says Michael Joyce, a financial planner in Richmond, Va.
Investing internationally also means assuming local market risks and the risks that shares of the companies could fall. And many emerging markets have racked up strong gains in recent years, leaving the stock markets at lofty levels.
"You could be correct in terms of your view of the movement of the relative value of the dollar, but the fund could still lose money because it made bad stock picks," says Michael Sapir, chief executive of ProFund Advisors LLC.
Still, interest in overseas investing has picked up as financial advisers counsel investors to take advantage of the falling dollar and protect themselves from a potential erosion of buying power.
"If you stay only in dollars, the rest of the world will leave you behind," says Dave Fernandez, a financial planner in Scottsdale, Ariz., who has 40% of his clients' stock allocation overseas. He has also shifted his U.S. stock exposure toward large-company stocks and away from small caps.
The reason: Companies in the Standard & Poor's 500-stock index -- the list of America's largest companies -- earn about 45% of their revenues overseas, "giving them a tailwind" as the dollar falls, says Sam Stovall, S&P's chief investment strategist. The foreign currencies companies earn from selling their products buy increasingly larger amounts of dollars when repatriated. That means bigger earnings from currency conversion.
Industries with the greatest exposure to foreign sales are: energy and technology, both of which generate 56% of their revenues overseas; and consumer staples, at 46%.
Investors with a moderate tolerance for risk should have at least 15% to 20% of their holdings in non-dollar-denominated assets, says Paul Barrett, head of foreign-exchange trading at J.P. Morgan Chase & Co.'s JPMorgan Private Bank.
The easiest way for investors to profit from a weaker dollar and to protect their investments is to own foreign stock and bond mutual funds that don't hedge against currency movements. Bill Rocco, senior analyst at Morningstar Inc., says most investors should own one or two international stock funds: one that holds large-cap stocks in big markets, and one invested either in smaller-cap stocks or emerging markets.
Some of Morningstar's picks in the category of foreign large-blend funds are Fidelity's Spartan International Index (up 7.4% through August), American Funds EuroPacific Growth (up about 10%) and Vanguard Total International Stock Index fund (up 10%).
For income investors, a variety of unhedged bond funds have emerged in recent years. Benjamin Tobias, a 56-year-old planner in Plantation, Fla., says he expects to see the euro hit $2 sometime in his lifetime, up from about $1.40 now. Two funds he has been directing clients to are DFA Five-Year Global Fixed-Income fund (up 3.5%) and American Funds Capital World Bond fund (up 2.2%).
Legend Financial Advisors in Pittsburgh has in recent months been increasing client exposure to Pimco Developing Local Markets fund, "effectively an emerging-country money-market fund," says Lou Stanasolovich, Legend's president. "You earn higher money-market-like rates of return, plus appreciation from the currency movement." The fund last year was up 12% and is up about 5% through the end of August.
Commodities have also historically benefited from dollar weakness. Mr. Stanasolovich says Legend has been buying for its clients stakes in the Van Eck Global Hard Assets fund (up nearly 19%) and the Vanguard Energy exchange-traded fund (up nearly 18%). The firm is also putting into some clients' portfolios individual stocks, including oil-service companies such as TransOcean Inc., Smith International Inc. and Atwood Oceanics Inc., and mining firms such as Brazil's Companhia Vale do Rio Doce, which trades in the U.S. as an American depositary share.
The purest play on currency movements is to own other currencies, which, in an online currency-trading account, can be a dicey proposition for inexperienced investors. But owning currencies directly has become increasingly easy with a string of ETFs, such as Rydex Investments' CurrencyShares funds that offer exposure to the pound, yen, euro and Swiss franc, among others.
Each share is backed by currency held in a London account, so investors benefit when the dollar weakens, but suffer when the dollar strengthens. The shares pay interest monthly, based on the local-currency interest rates, ranging from 6.8% for the Mexican peso ETF to 0.25% for the yen ETF.
Write to Jeff D. Opdyke at jeff.opdyke@wsj.com and Jane J. Kim at jane.kim@wsj.com
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