INVESTMENT OUTLOOK : ASSESSING THE MAJOR MARKETS : Cashing In on the Currency Craze : Several Options Exist to Profit From Gyrations in the Dollar’s Value
Investing in currencies was once nearly impossible for the individual investor. But the rise in overseas travel as well as news coverage of the dollar’s shifting value against foreign denominations has made currency speculation a game that more investors are playing.
“If you are European, you deal with currency exchange all the time,” said Jon Woronoff, publisher of International Fund Monitor, a Washington-based investment newsletter. “Americans were more familiar with equity investments like stocks and bonds than foreign exchange.”
Today, roughly $500 billion in foreign currency changes hands daily, almost twice what turned over three years ago, according to Seth Strickland, president of Shearson Lehman Hutton Strategy Advisors in New York. And most analysts attribute the increase to greater currency speculation.
The rise in currency speculation comes as political turmoil in Japan and Eastern Europe this year has provided the dollar with an unexpected boost. But upcoming events in Western Europe and Asia in the next decade may prove a mixed blessing for the dollar, analysts say.
Transferring control of Hong Kong to China from Great Britain in 1997 will provide “generally positive long-term news for the dollar,” said Michael Papaioannou, senior vice president for international financial services at WEFA Group in Bala-Cynwyd, Pa. But the unification of 12 European economies in 1992, Papaioannou said, may hurt the dollar because it is expected to boost the economies and strengthen the currencies of some of those countries, particularly West Germany.
Of course, it is hard for investors to profit from any rise and fall in the dollar just by driving down to their local bank and buying or selling different currencies.
U.S. banks buy foreign currencies at one price and sell at another. That differential, in most cases, wipes out any potential profit a customer might realize by exchanging small amounts of currencies at a bank.
“Every time you convert a currency at the bank you pay a big premium” because the bank doesn’t want to waste its time changing small amounts of money, said Woronoff.
Instead, investors seeking to profit from gyrations in the dollar’s value against foreign currencies can consider three other ways of investing.
* A well-heeled and adventurous person can invest directly in such exotic vehicles as foreign currency futures, traded on the Chicago Mercantile Exchange, or the seven foreign currency options traded on the Philadelphia Stock Exchange.
But because such investments involve extremely high risk, brokerages that arrange them will insist that an investor meet certain financial requirements, such as having a high personal net worth sufficient to absorb any losses.
* Those of more modest means might consider buying shares in one of the 79 international equity funds that invest in companies abroad. These funds get an added boost whenever the dollar weakens.
* For investors seeking a pure currency play, there are a growing number of foreign currency mutual funds that invest directly in such instruments as foreign certificates of deposit and commercial paper.
For example, the giant Boston-based investment house, Fidelity Investments, launched three new mutual funds in mid-November that invest overseas. Fidelity’s new funds join existing foreign currency funds managed by Pasadena-based Huntington Advisers Inc. and Shearson Lehman Hutton Inc. of New York.
There are, however, some significant differences in the way the three investment houses manage their foreign currency mutual funds. And despite their designation as foreign currency “mutual funds,” some of these funds require more investment knowledge and monitoring than their generally less volatile domestic counterparts, experts say.
“These are niche products; they are designed for investors who have some familiarity with currency markets and pay some attention to the direction of exchange rates,” said Gail Eisenkraft, a vice president at Fidelity.
Fidelity’s funds are set up similar to Shearson’s Global Currencies portfolio, launched late last year, featuring short-term money funds denominated in yen, deutsche marks, British pounds and Canadian dollars.
Although Shearson doesn’t charge for switching among its foreign currency funds, Fidelity will.
In effect, buying into one of Shearson’s or Fidelity’s funds is like opening a money market account in a foreign currency. In the case of Shearson’s funds, an investor paying the $2,500 minimum to open an account would have received a yield in one recent November week ranging from 5.26% for the yen to 14.52% for the British pound, plus capital gains if the foreign currency strengthened.
The downside of such single currency funds is that sometimes the foreign currency falls in value against the dollar and offsets any interest gain made by investing in a foreign country’s bank certificates of deposit, commercial paper, government bills or other short-term investment vehicles. For the first 10 months of this year, for example, both the yen and the pound experienced capital losses in the Shearson funds.
To minimize such risks, some investment houses are establishing multi-currency funds that invest in a pool of foreign currencies to achieve either high yields or capital appreciation, or both, against the dollar.
Huntington Advisers, for example, recently discontinued its single currency funds and set up a multi-currency, high-income currency portfolio, a hard currency portfolio oriented toward capital appreciation, and a global cash portfolio that attempts to produce both interest income and currency appreciation. Shearson also offers a multi-currency fund.
Huntington, which now has about $150 million in funds under management, feels such funds are less speculative than the single currency funds.
“The problem we found with the single currency funds is that people kept jumping around and eventually ended up in our multi-currency fund anyway,” said Donald P. Gould, Huntington’s president.
FOREIGN EXCHANGE ROLLER COASTER A decade of political upheavals and policy changes has caused the dollar to fluctuate wildly compared to the durrencies of other major industrialized countries. (Figures show dollars in the foreign currency.)
Year Deutsche mark Pound Yen 1980 1.96 0.42 204.08 1981 2.31 0.52 222.22 1982 2.38 0.62 232.56 1983 2.72 0.69 232.56 1984 3.15 0.86 250.00 1985 2.46 0.69 200.00 1986 1.94 0.68 158.73 1987 1.57 0.53 121.95 1988 1.77 0.55 125.00 1989* 1.87 0.62 138.88
* Through Sept. 30 Source: Huntington Advisers Inc.
