Dumb and Dumber

The Sunday Business section in today’s New York Times has a story on currency funds, which are getting a lot of attention these days along with general concern about the U.S. dollar.

The Franklin Templeton Hard Currency fund (ICPHX) is the oldest and largest of this species.

As the Times explains:

It [ICPHX] is generally designed to rise sharply when the dollar takes a big fall—but it is likely to decline in periods when the dollar is surging. At other times it should return money market rates.

Except it does not charge money market fees:

The Franklin fund has an initial sales charge of 2.25 percent and charges 1.19 percent a year for expenses.

In other words, this is an extremely expensive money market fund most of the time, but it will do well if you can time the dollar’s movements perfectly. Good luck with that.

Franklin Templeton is an outstanding firm, especially in the area of international investing, but this particular fund is just not their best product.

NYT notes that ICPHX has $214 million in assets and has been around since 1989. If you’re running a fund out your basement, that might be pretty impressive. But if you’re one of the largest fund houses in the world with a sales force being paid a 2.25% load to sell it, that’s a pretty lame showing for 17 years of work.

I have no doubt that Franklin has done a good job managing this fund in accordance with its investment objectives. And I’m quite certain that the people who get paid to sell it have done their best to pitch it to investors. So performance and distribution can’t explain the relatively small amount of assets under management.

There may be a simple explanation: it’s just a dumb concept. Currency ETFs, which can be sold short and traded throughout the day, are even dumber.

Taking a 100% U.S. portfolio and shifting 5% of it into a fund such as ICPHX—or any forex fund—isn’t going to give you a global portfolio, just like putting a saddle on a dog doesn’t make it a racehorse. It might not even be a very effective hedge when you consider the costs.

If you are worried about the dollar—or whatever your home currency may be—there is only one long-term solution for protecting your portfolio: complete global diversification from Day One. This is accomplished by buying securities from both your home country and overseas, with an emphasis on firms that are globally diversified in the way they run their businesses. This is what borderless investing is all about.

I have said this before about commodity ETFs and the same applies to currency-related funds of all flavors: If want to be a trader, get a futures or options account and do it the way a real trader would. Is it risky? Extremely. Stressful? Incredibly. But so is being a trader. Get used to it.

Trading and long-term investing are completely different approaches to the market and both can be very rewarding. But you need to take one path or the other. Trying to mix both together is a recipe of failure.

Or as Mr. Miyagi put it in the Karate Kid:

“Walk on right side of road, safe. Walk on left side, safe. Walk in middle, sooner or later, squish, just like grape.”