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At FPA San Diego, Currency Manager Merk Says No ‘Safe’ Assets Left

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Currency fund manager Axel Merk says investors need to throw out the risk-free component of their portfolio, as there is no such thing as a “safe” asset anymore.

Axel MerkSpeaking Saturday at the FPA’s national conference in San Diego, Merk (left), president and CIO of Merk Investments, said investors need a proactive and diversified approach to their positions even in cash. He cautioned that currencies are at risk of losing their traditional function as a “store of value;” the implications of such an environment, he said, are far-reaching.

“Government and central banks have gotten involved to the point where correlation with traditional asset classes is breaking down,” Merk told AdvisorOne following his presentation.

Asked specifically about the Swiss government’s decision to cap the franc earlier this month, Merk noted he had reduced his position to 1.5% of the portfolio on anticipation of the measure.

“Any time volatility is below normal, we take a step back,” he said. “That’s what was happening with the franc, and we pared back our position.”

He said Swiss National bank Chairman Philipp M. Hildebrand tried to peg the franc in 2009, but did not have the political support.

“It’s just his philosophy to do something like this,” Merk said. “He finally got the political support to do it, but we’ll see how long it lasts.”

He said the Japanese yen still offers investors opportunity, and the more dysfunctional the Japanese government is, the better for investors, since politicians won’t be spending money on stimulus projects.

“Central bank action by Japan is typically ineffective,” he said. “When it has worked, it just means the yen has gone on sale, so it’s like, “Hey, thank you.’”

When asked how he performed through recent market volatility, Merk notes his company started in the fund business with one mutual fund and $1 million in 2005. It now manages $850 million and has four funds.

The firm’s latest, launched Monday, is the Merk Currency Enhanced U.S. Equity Fund (MUSFX). The no-load mutual fund seeks to outperform the S&P 500 Index by managing the U.S. Dollar and other currency exposures inherent in U.S. equity investments.

“Investors have huge exposure to the U.S. dollar and are therefore susceptible to U.S. dollar risk,” Merk said. “We are applying our currency expertise in an innovative way, providing investors with the opportunity to manage the currency risk of their U.S. equity investments, regardless of the direction of the U.S. dollar.”