From the December 2003 issue of Investment Advisor • Subscribe!

December 1, 2003

The Dollar is Falling

David Tice, manager of the Prudent Global Income Fund believes the dollar's decline will continue. He invests in developed-nation sovereign debt, and in gold.

Though the stock market is showing solid signs of recovery, some investors are still wary of equities. After waves of corporate accounting scandals, and with the current troubles in some mutual funds, advisors are now monitoring their clients' investments more closely. But the jury is still out on whether bonds are a better alternative to equities. According to an IA poll of advisors in late October, 38% said they had increased their bond allocations since September, while 39% of respondents had decreased their allocations. Interestingly enough, in a similar poll held five months earlier in mid-May, 53% of readers said they increased their clients' equity allocations since the beginning of the year, while 13% increased their allocation to bonds, 17% increased to cash, and 17% made no changes. One beneficiary of this unrest in the financial planning community is the Prudent Global Income Fund (PSAFX). Rather than buying U.S. equities and Treasury investments, this fund buys offshore sovereign debt investments, common stocks of gold and silver mining companies, and gold bullion.

Prudent Global Income Fund, formerly Prudent Safe Harbor Fund, is run by founder David Tice and is a no-load mutual fund structured to benefit from a falling dollar and rising gold prices. Similar to many international bond funds, PSAFX invests in government securities of industrialized countries like Switzerland, Germany, and Canada, rather than foreign corporate or agency debt instruments. "We maintain a buy-and-hold strategy," says Tice. "As new money comes in, we put it to work."

For the three-year period ended September 30, 2003, PSAFX had an average annualized total return of 12.9%, versus a total return of -7.4% for the FTSE World Index (excluding U.S.), and -0.3% for all international balanced funds, according to Standard & Poor's. This fund ranked third within the entire universe of the 43 funds in its peer group. And its returns have steadily risen since the fund's inception in 2000. We spoke with David Tice last month about his fund, and why advisors might want to consider it for their clients.

Why did you create this particular fund? We felt there was a niche opportunity. We understood that the dollar, as a world reserve currency, was being used to the extreme, and that eventually our foreign trade partners would grow weary of the massive credit creation that we have embarked upon. And given the magnitude of our current account deficits, the dollar would decline. I think we were fairly correct in that outlook.

Tell me about your management style. We believe strongly in investing outside the U.S. dollar; that is our charter. We want to be in sovereign debt obligations of major trading partners where we feel like the currencies will appreciate relative to the dollar. We are about 65% invested outside the dollar, with about 15% in gold stocks and 2% to 5% in gold bullion. [The remainder of the fund's investments are in cash and U.S. government bonds.] We are buy-and-hold investors in those areas; we are not trading-oriented. We are watching areas where we feel like the dollar might be dramatically oversold, so we might hold off on buying securities for a week or so until we get a return to equilibrium.

What do you look for in the foreign bonds you invest in? We are pretty straightforward, in that we are not invested in corporate bonds. We are not in asset-backeds; we are just in government bonds. Maturity is one to three years, so we are staying very short. This is set up to be a safer fund by eliminating the risk of default. And we are reducing the risk of dramatically rising rates by being in the shorter-maturity instruments.

Do you just invest in industrialized countries like Switzerland, or does you take more risk with developing countries such as in Eastern Europe? We invest in countries whose fiscal situations we feel are in better shape than that of the U.S. They are generally running current account surpluses, and the currency will appreciate relative to the U.S. dollar.

Do you consider broad geopolitical issues when investing in bonds and equities from other countries? We are not investing in emerging market nations where there might be some question about us being repaid. We are looking at the aggregate economic picture, and making a call on the currency relative to the U.S. dollar. Warren Buffett just said it doesn't really make that much difference what currency you are in, as long as you stay away from the U.S. dollar.

How does the fund correlate with the performance of the broader U.S. equity and bond markets, and the international stock and bond indexes? When somebody buys this fund, will it perform differently than the U.S. indexes? Yes, it will. There are two different correlations: how well the dollar does relative to, say, the dollar index would be number one, and the second is how gold stocks do. This fund correlates more closely to an international bond index.

What percentage of cash do you usually keep? Six percent is pretty typical for us; [we tend to] have a higher short-term Treasury position. We are in very liquid Treasury securities.

What do you look for in gold equities before you invest in them? Are your requirements different country by country? We're looking primarily for gold stocks that we feel are undervalued. We invest in bigger companies, and like to own stocks with dividend yields to give us a yield on the total fund. We have invested in some slightly smaller companies, but generally we are after producers.

What sort of flows have you experienced in the fund? We've had some pretty significant inflows. We are now at $500 million, and a couple of years ago we were under $100 million. This [is a result of investors'] recognition that the dollar is likely to be on the decline. Ben Bernanke of the Federal Reserve gave a speech saying that we possess a printing press and therefore there should be no fear of deflation. (For an excerpt of Bernanke's speech, see sidebar at right.) But we are in an environment where nations are increasingly having competitive currency devaluations.

Why should someone invest in your fund, as opposed to a similar fund? This fund is one of a kind, in that it is a hybrid of an international fixed-income fund with a gold component kicker, and I don't think there is anyone else like that. There are lots of international bond funds, but we are marketing from the vantage point that the dollar will decline. And although people who buy international bond funds realize that that is an advantage, it is not necessarily marketed that way. Those bond managers don't recognize that gold can be a currency substitute, and we think that gold will do very well.

How often are current holdings reviewed? We have an international expert based in London who advises me on this fund. He watches international markets daily and we are doing continual readings of what is going on internationally. We don't have positions in Botswana and Tangiers; rather we have positions in major countries like Switzerland and Norway. But we do watch the news and if at the margin we see something developing that we don't like, we sell that country. That is how we determine the weight of each country. [We invest in countries that are] most attractive on a risk/reward basis.

Where do you see this fund fitting into someone's portfolio? Who is your average investor? It can fit in as a less volatile, safer fund. When you look at the potential risk in some of the securities that are held in some other fixed-income funds, like asset-backed securities, agency securities, etc., we like the fact that this is invested in sovereign debt. So it can be a fairly high proportion of peoples' near-term cash resources, and it is an easy way to invest in government bonds outside the country.

What are your thoughts on how Elliott Spitzer and other state and federal regulators and law enforcement folks are investigating late trading and market timing within the mutual fund industry? I think it is great that it's being reviewed. I think it is a travesty that this type of thing went on among these individuals who were fiduciaries. We feel that increased scrutiny is appropriate.

What are your market expectations for the next six months? The economy is recovering due to a massive amount of debt that has been taken on. It is very unstable and unbalanced in growth, and it is due largely to massive increases in debt relative to home ownership. With significant inflation with real estate prices, it is unsustainable. You have a mortgage industry that was set up to serve as an ATM machine for individuals as their houses went up in price. As rates fell, the industry went to the consumer and said, "You have this piggy bank of your house that has gone up in value, and you have these lower rates; therefore, we can send you a check, your payment stays the same, you can go spend money at Home Depot and Bed, Bath and Beyond." That stimulated the economy, but what happens now [when rates stabilize or start to rise]? That game is about over.

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