Multi Currency Lessons

by | Dec 9, 2007 | Multi Currency Investing

Multi Currency Lessons in this update are good.

Multi Currency Lesson #1: The Swiss Samba Portfolio shows how Latin investments are suffering. This portfolio is down 5.85% since we began tracking November 1st, 2006. That’s dropping at a 70.2% per annum pace but only as part of a falling US dollar.

This is a big lesson is about forex risk. All the loss in the Samba portfolio is from currency shifts. Three of the four investments in the portfolio are up. The loss is from a drop in the Mexican peso and the Swiss franc’s appreciation versus the US dollar. Due to the weak greenback, the $150,000 loan has risen to $156,481.70. The Swiss Samba investments as a collective have risen $632, but the rise in loan repayment costs is $6,481.

This means that the Swiss samba portfolio is suffering because all the Latin currencies tend to be linked to the US dollar and to date have dropped with the buck versus the euro and Swiss franc.

Multi Currency Lesson #2: The opposite is true of the broadly diversified US dollar short portfolio. This portfolio has jumped up + 9.09% since November 1, 2006. That’s an annual rate of increase at 109.08%! This is incredible for such a broadly based, safety oriented portfolio.

All but one (again Mexican peso) of the 17 investments (with accrued interest) are in profit. Almost all of that profit comes from the drop of the US dollar.

This portfolio also has some extra inherent strength. Both the Turkish Lira and Icelandic kroner have devalued versus the dollar in this last month, but their high interest rates have kept them in the black. These currencies have devalued horribly over the past year so their drop is likely to stop or slow. If there is no more drop in the parity of these two currencies, their high earnings will enhance this portfolio’s return in months to come.

This is what the traditional multi currency sandwich is about…getting a higher return for taking a currency risk. If you spot the correct currency trend you win and depending on the leverage you use your winnings can be huge.

On the pother hand the Swiss Samba warns us. When the currency goes against you, the leverage can run up losses quickly. This is why we should never invest more than we can afford to lose.

Multi Currency Lesson #3: We can see the power of currency shifts by comparing the dollar short versus the dollar neutral portfolios.

These two portfolios are identical except for three investments and the loans. The dollar short has a US dollar loan and its three core bond holdings are in euro. Here are these bonds:

Currency Bond   Invested Value Now Accrued Int.
EUR 6.25% Turanalem Finance BV 27.09.2011 15,000.00 15,734.95 100.52
EUR 4.75% Iss Global A/S 18.09.2010 15,000.00 15,622.79 76.40
EUR 8.625% NXPBV 15.10.2015 15,000.00 15,518.49 138.72

The dollar neutral portfolio has a mixed loan of yen, euro, Swiss franc and Czech kroner. Of the 17 investments it holds three are dollar bonds instead of the bonds above denominated in euro. Here they are:

Currency Bond   Invested Value Now Accrued Int.
USD 3.875% Deutsche Telekom 22.07.2008 12,000.00 12,029.43 47.79
USD 5.45% Hutchison 24.11.2010 15,000.00 15,134.46 84.02
USD 7.20% Porsche Intl 01.02.2049 15,000.00 15,000.00 111.00

The difference in these three holdings and the loans makes the difference between a 9.09% return and a loss. I am puzzled by the short fall in the investment side of the dollar neutral portfolio and am checking with Jyske Bank. The loss does not appear quite correct and I believe it’s lower than it appears but the point is still clear. There is a huge difference in performance all due to the falling US dollar.

Multi Currency Lesson #4: Emerging markets continue to rise. The emerging market portfolio which is a modification of the emerging Asian portfolio (that rose 114% last year) continues to rise at a steady pace, up 4.46% or at an annual clip of 53.28%. The changes made were that Turkish and Eastern European equities replaced all the position in Japanese equities and some of Far East Asian Equities. Plus the loan was shifted from yen to Czech koruna.

The loan remains somewhat hedged ( Eastern Europe financed with the Czech koruna loan). To date that Eastern European position has been the big winner so this shift appears to be making sense.

Multi Currency Lesson #5: Green Investing Can Be Profitable. I am tickled pink to see the added green in the Green Multi Currency Portfolio. This is the star performer to date, up 15.93% since November 1, 2006. That’s growth at an 191.16% annual rate. However most of this profit stems from just one share, Vestas the windmill maker which is up around 30%.

Another lesson here is that once in awhile we get lucky. This big rise came right after we chose this investment. We had no idea it would comes so soon. Just like the Asian portfolio rose last year. More importantly we can see that investing in big environmental concerns can be profitable and this is good.

Until next update, may all your leverage uplift you!


See Attached file.

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