Multi Currency Portfolio Drop

by | Jul 21, 2006 | Multi Currency Investing

Multi currency drops have highlighted the last quarter that has been filled with turmoil. I have been writing about the concept of Borrow Low for at least 20 years. In the past five years or so high liquidity in the US and Japan created low interest rates for the dollar and yen. This led a much larger audience to be interested in Borrow Low. When central banks began hinting this year that interest rates were on the rise, many investors with a lot less years of experience panicked.

The turmoil began when they started unloading emerging currency portfolios to pay off loans in yen, low cost dollars and other low interest currencies such as the Swiss franc.

This led to the first double-digit monthly decline in emerging equity markets since September 2002.

Emerging Markets continued their decline during the first half of last month.

Now they are recovering and in the second half of June they had bounced back to around their end-of-May levels. In June, the MSCI Emerging Markets Total Return Index lost 0.2 % in US dollars and rose by the same amount in euros.

From the beginning of the year, the MSCI Emerging Markets Index is up 7.2 % in US dollars, but due to a 7.8 % decline of the dollar versus the euro, the Emerging Markets benchmark lost 1.1 % in euros year-to-date.

We can see this rebound in the MultiCurrency Portfolios.

The Asian portfolio continues to be the shining performer as it rose again since our last update when it was up 49.9%. The Asian portfolio is now up 60.54% (since we initiated this study Oct 2005) and has nearly doubled in two months. (it was up 38% two months ago).

The Emerging Market Portfolio also rebounded from being up 4.68% to up 16.47% which is almost exactly where it was the month before.

The Dollar Portfolios are all still in losing territory, but have recovered a bit. The Dollar long is up from

-16.7% to -10.78%, Dollar Short, from -14.6% to -10.64% and the Dollar Hedge up from -14.5% to -9.5%.

If we look at all five portfolios as one with an equal weighting the rise is from 8.9% to 11.2% appreciation in nine months. This is an average of 14.88%.

We are pleased. These portfolios have passed through one of the blackest periods of the decade and have held up well. When viewed as a total on an equally weighted basis they have grown at a faster clip than double money in the bank.

This is a continued lesson in the stabilizing and growth power of global diversification.

The rapid rebound of the Asian and Emerging Currency portfolios reminds us again that emerging equities not only held up better than emerging currency bonds, during the down turn, but that equities are performing better in the recovery as well.

Look at my portfolio at

You will see I had eight equity mutual funds and seven are Asian or emerging markets. I have only three emerging bond funds ( Brazil , Turkey and Hungary ). This month I added a ninth emerging market fund, The Jyske Invest Turkey Fund in the belief that the Turkish equities are likely to help me recover the losses suffered in the Turkish TRY bond.

Investing in any emerging stock, bond or emerging currency is not without risks. My Turkish Lira bond is an example. The interest rate at 11% is great but the lira has devalued a lot. I invested $100,000 three months ago and the bond dropped to $83,000 in dollar terms.

This does not look good, but a sensible way to correct this is to invest in Turkish stocks! I have followed this market and observed that as the Turkish currency drops (because of inflation), the stock market rises even more.

We can get a feel for this by looking at the annual performance of the Turkish Investment Fund. This fund is a closed end mutual fund managed by Morgan Stanley that started in 1989 and is traded on the New York Stock Exchange. The fund invests in Turkish equities.

Its net asset value over the past ten years in US dollar terms is up 17.41% per annum. So although the Turkish currency has dropped through the floorboards in this decade, the stock market has risen far more than the currency drop. Although the fund’s NAV is up 32% in the last 12 months, it is currently down. The net asset value peaked in the $24 per share range this February 2006 and has plummeted to $15. I suspect that this is a very good time to buy this fund.

However this market is a roller coaster sort of like gold but with shorter cycles. The price drops and drops, then rushes up in spurts. Take a look at the annual performance of the share’s trading price in New York and its net asset value. If you do as I do and invest in this market and it has a -33.32% year as in 1998, you may regret doing as I have done…unless it’s followed by a year like 1999 when the NAV rocket up 274.05%.

Year Share Price Net Asset Value
1990 -43.25% -35.71%
1991 16.38% -4.56%
1992 -31.15% -40.10%
1993 171.39% 151.74%
1994 -59.85% -58.29%
1995 -2.43% -1.55%
1996 4.83% 17.22%
1997 36.67% 65.72%
1998 -39.28% -33.32%
1999 306.29% 274.05%
2000 -42.35% -40.40%
2001 -26.79% -28.31%
2002 -25.97% -32.24%
2003 166.90% 118.33%
2004 63.73% 35.90%
2005 53.76% 65.76%

Now let’s apply the returns in this market to the MultiCurrency Sandwich.

Look at the loss one would suffer with a leveraged investment during the worst (-58.29%) downturn year.

If leverage was one time (as an example $100,000) borrowed and $100,000, invested for a total investment of $200,000. A 58% loss on $200,000 would be $116,000. In other words the investor would lose the entire original investment. In actuality the bank would have forced a sale or required more money before all was lost. But in this scenario we do not even have to look at a two, three or four times loan. At four times loan to value leverage a 25% drop wipes out the entire investment!

That’s the risk.

Now let’s look at the reward. Had an investor leveraged one time during the highest run up (274.5%) the $100,000 at risk would be worth $449,000 less interest (at 2% this is $2,000). Two times loan would turn $100,000 into about $622,000. Three times leverage creates about $796,000 and four times turns $100,000 into just over a million dollars.

Of course there was only one year in the last 15 that had that incredible 274% appreciation. (As only one year had a 58% drop).

There certainly are plenty of risks. In seven of the fifteen years above, a four times leverage would have wiped out the entire original investment (assuming the investment started and ended in the exact year).

However in seven of the 15 years the investment would have made a very handsome profit.

Here is an exercise I highly recommend you to take. Calculate how much a one-two-three and four times leveraged investment of $100,000 would have made in each of the 15 years above. Report back to me what you calculated.

The message? Emerging stocks can really create a jackpot, but never invest more than you can afford to lose or protect. If you get in these markets, be prepared to hold on for the long term and be sure you can afford the risk.

Is the risk worth the potential reward? For me emerging markets are worth it, yes (though I have very low leverage).

You need to look at this carefully with your financial planner to decide what might work for you. If losing $25,000 (minimal sandwich) would not hurt too much, but making $100,000 or more would mean a lot, consider this.

Otherwise use caution and diversify.

Here is one more quick note. Observe in the numbers above how when the net asset value of the fund is down that the share price almost always drops even more. This is because investors hate loss. Yet note that when the NAV is up (especially way up), the share price is up even more. This is because most investors are greedy. They jump on the band wagon late.

So the best way to cash in on an investment like this is to get in when it’s on its way down. You can learn more about this fund at

Jyske Bank by the way has an open end fund that invests in Turkish equities which is where my money will go. You can get details from Thomas Fischer at

Or go to

Select JI Turkish Equity Fund in the Jyske Invest Int. Equity Fund drop down box.

Since this is an educational service we have committed to keep these five portfolios steady for a year. However in the investing world one would be thinking about ways to adjust. Increasing equities in the dollar portfolio would be one way to enhance performance which is what I have done with my own investments in Turkey .

Until next update, good investing to you!