The Dollar is Falling

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.