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10 Questions About Currency Investing

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If you're considering investing in currencies, here's what you need to know.

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How much of an investor's portfolio should be in currencies?

BAUR: Investors are systematically underweight in foreign currency exposure. Today, you would want to have between 10% and 20% of your portfolio invested in foreign currency denominated instruments.

In the traditional 60% equities and 40% fixed income portfolio, between ¼ and ½ of the fixed income portion should be in foreign currencies. If the Fed funds rate were at 5%, then I would back off my currency exposure to the 5% to 10% range.

How can an investor evaluate a currency fund?

BAUR: It's not straightforward, partly because currency funds are relatively new, and different managers do significantly different things.

Some focus exclusively on G10 currencies like the euro, the yen, and the British pound. Others focus on emerging markets currencies. Some, like us, invest across the universe.

So, first of all, understand what the fund's investment universe is. Then understand the managers' investment styles.

Are they short-term traders who are likely to have relatively volatile funds, or are they long-term investors who are trying to manage the volatility and benefit from longer-term trends?

Finally, what returns has the manager produced given the risks?

[Editor: Over the last one-, three-, and five-year periods, the fund has earned 6.05%, 2.05%, and 5.24%, respectively. In contrast, the Barclays Capital Global Ex-USD Index has returned 1.89%, 1.46%, and 1.33% over the same periods.]

What's your best advice for someone who wants to invest in currencies?

BAUR: Buy a currency fund. You need exposure to foreign currencies. Your currency exposure should be managed rather than passive.

The currency space has significant inefficiencies you want to take advantage of. Those inefficiencies create opportunity for active managers to make profits.

You won't benefit from those inefficiencies if you take a passive approach to currency investing.

What attracted you to this investment style?

BAUR: It brings together three things that I'm passionate about. It's economics, politics, and geopolitics all wrapped up in one.

Every day I come to work and get to study what's happening around the world. I feel privileged to be in a position to do that.

Editor's Note: This article by Gregory Taggart was originally published on MintLife.

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Twitter: @mint
No positions in stocks mentioned.
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