Last month we purchased Fidelity Limited Term Bond (FJRLX) in our model portfolio. Part of our strat...
Hedged-Funds: Shelter from the Dollar
04/30/2015 9:00 am EST
What happens when the Federal Reserve raises rates while the rest of the world is cutting rates? A huge dollar rally, suggests Russel Kinnel, editor of Morningstar FundInvestor.
That leads me to my theme of dollar-hedged investments. In general, I prefer funds that don’t hedge because I want currency diversification even though it means greater volatility. In addition, currency hedging has an added cost that seems unnecessary, as currency moves tend to wash out over time.
Yet an investor at—or near—retirement might prefer not to take on the added risk. In addition, the current environment seems to make a dollar rally more likely even though one can never be certain about macroeconomic forecasts.
With all that in mind, I’ve selected a few of my favorite dollar-hedged ideas. Keep in mind the dollar rally has boosted returns for all these funds so far in 2015.
Tweedy, Browne Global Value (TBGVX)
This fund has a nice cautious value approach in the Warren Buffett style. The chief difference is that management of this fund prefers a more diffuse portfolio than Buffett’s. In addition, it owns a fair amount of small- and mid-caps, which provide greater diversification than foreign large-caps.
Over time, this fund has produced great results and we’ve been impressed by management’s stability in the face of a generational hand-off.
Vanguard Global Minimum Volatility (VMVFX)
This fairly new fund follows a global equity index slanted toward less volatile stocks. To further reduce volatility, Vanguard hedges currency risk, a major source of volatility with foreign equities. Naturally, it is super cheap, with a price tag of just 0.30%.
The fund is 55% invested in North America, 20% in Europe, and 22% in Asia. If your goal is to bet on a rally versus the euro, this is the right fund, but it makes for an appealing core holding, too.
iShares Currency Hedged MSCI EMU (HEZU)
This exchange-traded fund tracks a MSCI Europe index and then hedges the currency exposure. The fund is cheaper than actively managed funds, but its expense ratio of 0.51% is pricier than Europe index funds that don’t hedge. So, you clearly need to put some value on that hedging to choose this fund.
PIMCO Foreign Bond USD-Hedged (PFODX)
PIMCO makes this fund available in hedged and unhedged versions. The hedged version is significantly less volatile, so it’s not a bad idea.
Specifically, its five-year standard deviation is 3.17 versus 5.97 for PIMCO Foreign Bond Unhedged (PFBDX). Andrew Balls was named manager last year amid the Bill Gross tumult; Balls can tap a deep team of analysts and traders and we still think this is a strong option.
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