Global Dynamics in 2011 Implications For Investors

Transcription

1 January 2011 Axel Merk, President and Chief Investment Officer For Professional Use Only Global Dynamics in 2011 Implications For Investors Merk Investments 555 Bryant Street, #455 Palo Alto, CA Please read important risk disclosure and Fund related information towards the end of this presentation.

2 2011 Currency Outlook

3 Independent Research During the recent crisis in the Eurozone, Merk s research showed that the European Central Bank s (ECB) approach to monetary policy is more robust than that of the Fed. Merk saw a buying opportunity when others had written off the euro. Source: Bloomberg, Merk Investments

4 Growth & Currencies X Weak economies may have strong currencies

5 Skewed Pendulum Deflation Inflation

6 U.S. Eurozone - Asia Countries act in their perceived self-interest Weak Dollar Strong Euro Strong RMB / Weak VND

7 PIIGS in the Eurozone Eurozone GDP 9 trillion (as of 12/2009) Source: Bloomberg, Eurostat

8 Central Bank Balance Sheets

9 Fate of Currency There is no such thing anymore as a safe asset: investors may want to consider a diversified approach to something as mundane as cash. Axel Merk, 2006 Asset classes increasingly correlated - Increased intervention by policy makers Currency asset class offers uncorrelated returns - Directional vs. non-directional currency investing Central Banks diversify their reserves to managed baskets of currencies

10 Gold Outlook

11 Gold Gold Price

12 Gold Outlook The low industrial use of gold makes it the commodity with the greatest sensitivity to monetary policy. Axel Merk Gold beneficiary of global reflationary efforts Gold market much smaller than currency markets - US $4 trillion daily turnover in currencies Gold is the only currency with intrinsic value

13 Bond Bubble?

14 US Gov t Yield Curve

15 Corporate Yield Curve

16 Junk Bond Issuance (First 3 quarters each year)

17 Int l 3 month T-Bills

18 Austerity Eurozone Germany vs PIIGS U.K. All eyes on BoE U.S. What austerity? Asia No free lunch

19 Implications for Investors

20 Implications Asset classes increasingly correlated Seek uncorrelated returns? Bond bubble? Consider reducing interest and credit risk Currency crisis No safe asset: consider diversifying to baskets of currencies

21 Currency Asset Class

22 Investment Approach

23 Investment Approach Directional Directional Currency Correlation to Select Asset Classes The following indices are used as proxies for the respective asset classes: Source: Bloomberg, Merk Investments Currency: Inverse U.S. Dollar Index. Fixed Income: JP Morgan U.S. Aggregate Bond Index. Commodities: Deutsche Bank Liquid Commodities (DBLCI) Index. Real Estate: NAREIT Index. Equities: S&P 500 Total Return Index. All calculations based on daily data to 12/31/2009

24 Investment Approach Non-Directional Non-Directional Currency Correlation to Select Asset Classes The following indices are used as proxies for the respective asset classes: Source: Bloomberg, Merk Investments Currency: Deutsche Bank Currency Returns (DBCR) Index. Fixed Income: JP Morgan U.S. Aggregate Bond Index. Commodities: Deutsche Bank Liquid Commodities (DBLCI) Index. Real Estate: NAREIT Index. Equities: S&P 500 Total Return Index. All calculations based on daily data to 12/31/2009

25 Currency Asset Class Market Inefficiencies Market Inefficiencies Create Profit Opportunities

26 Currency Asset Class Low Volatility Low Volatility Compared to Traditional Asset Classes Source: Bloomberg, Deutsche Bank Equities: Chicago Board of Options Exchange Volatility Index Fixed Income: USD Swaption 5 Year Fixed/Floating Volatility Index Currencies: Deutsche Bank FX Volatility Index

27 Adding Currencies to Portfolio Where Currencies Fit in Asset Allocation

28 Adding Currencies to Portfolio Currencies May Offer an Attractive Risk/Return Profile Fixed Income: JP Morgan U.S. Aggregate Bond Index. Commodities: Deutsche Bank Liquid Commodities (DBLCI) Index. Real Estate: NAREIT Index Equities: S&P 500 Total Return Index. Currencies: Merk Hard Currency Fund. Source: Bloomberg, Merk Investments Performance data represents past performance and is no guarantee of future results. Current performance may be lower or higher than the performance data quoted. Investment return and principal value will fluctuate so that an investor s shares, when redeemed, may be worth more or less than original cost. Please visit for most recent month end performance. The Fund s Investor Shares expense ratio is 1.30%. Calculations for period 5/10/2005 (inception of Investor Shares [MERKX]) - 12/31/2009. One cannot invest directly in an index, nor is an index representative of the Funds' portfolios. Through 09/30/2010 the Merk Hard Currency Fund Investor Shares had a 1-year return of +2.91%, a 3-year return of +4.91%, a 5-year return of +7.19% and an annualized return of +6.21% since inception on 5/10/2005.

29 Adding Currencies to Portfolio Efficient Frontier Including Currencies 20 years through Dec 31, 2010 Source: Bloomberg, Merk investments All calculations based on daily data (12/31/ /31/2009) Equities: S&P 500 Total Return Index Currencies: Deutsche Bank Currency Returns (DBCR) Index

30 Adding Currencies to Portfolio Ways to Incorporate Currency Exposure

31 About Merk Investments

32 Merk Mutual Funds Merk Hard Currency Fund Seeks to profit from a decline in the U.S. Dollar relative to hard currencies Merk Absolute Return Currency Fund Seeks absolute returns investing in currencies regardless of prevailing market conditions Merk Asian Currency Fund Seeks to profit from a decline in the U.S. Dollar relative to Asian currencies Currency Mutual Funds AUM 3 Merk Funds 33% 11 Other Currency Mutual Funds Source: Bloomberg, Morningstar Includes all 14 Currency Mutual Funds as listed by Morningstar and their AUM as listed by Bloomberg as of 6/30/10. Merk Investments 2010

33 Merk White Papers Deterioration on Aggregate - An Analysis of the U.S. Fixed Income Market "Given the current environment, investors may want to take a close, hard look at the risks associated with the fixed income component of their portfolios. Recent evidence suggests that, on aggregate, the underlying fundamentals of fixed income investments throughout the economy have become riskier. The average duration of fixed income investments has increased substantially, while investor demand for lower quality securities appears to have increased..." Currency Investing - Mutual Funds, ETFs & ETNs "At $4.0 trillion in average daily turnover, the global currency market dwarfs the U.S. bond and equity markets. The first currency ETF was launched in 2005 and the first ETN was launched in Since then, we have witnessed rapid growth in the number of currency investment vehicles available: as of June 30, 2010, there were a combined total of 43 listed currency investment vehicles (14 currency mutual funds; 19 currency ETFs; 10 currency ETNs)..." Portfolio Benefits of The Currency Asset Class "In an environment with increased correlations across most asset classes, portfolio diversification is of the upmost importance. The currency asset class may be attractive in this respect, as it exhibits very low correlations to many asset classes. Moreover, the unique attributes of the currency asset class may lead to inherent inefficiencies and profit opportunities. As such, currencies may provide investors with valuable portfolio diversification benefits, possibly providing superior risk/return characteristics to an overall portfolio..." The Currency Asset Class - A New Era of Investment Opportunity "Diversification has always been an important aspect of investing, and is an issue that has gained greater importance in light of recent market turmoil. When traditional asset classes move in the same direction simultaneously, investors have limited options in protecting against the downside. The currency asset class may meet this objective..."

34 Disclosure This material is intended for use by investment professionals and institutional investors. It may not be reproduced or shown to members of the investing public or used as sales literature. Since the Fund primarily invests in foreign currencies, changes in currency exchange rates will affect the value of what the Fund owns and the price of the Fund's shares. Investing in foreign instruments bears a greater risk than investing in domestic instruments for reasons such as volatility of currency exchange rates and, in some cases, limited geographic focus, political and economic instability, and relatively illiquid markets. The Fund is subject to interest rate risk which is the risk that debt securities in the Fund's portfolio will decline in value because of increases in market interest rates. As a non-diversified fund, the Fund will be subject to more investment risk and potential for volatility than a diversified fund because its portfolio may, at times, focus on a limited number of issuers. The Fund may also invest in derivative securities which can be volatile and involve various types and degrees of risk. For a more complete discussion of these and other Fund risks please refer to the Fund's prospectus. It is typically not possible to invest directly in an index. Before investing you should carefully consider the Fund's investment objectives, risks, charges and expenses. This and other information is in the prospectus, a copy of which may be obtained by calling MERK FUND or visiting the Fund's website. Please read the prospectus carefully before you invest. Foreside Fund Services, LLC, distributor.

35 January 2011 Global Dynamics in 2011 Implications For Investors Axel Merk, President and Chief Investment Officer For Professional Use Only Merk Investments 555 Bryant Street, #455 Palo Alto, CA 94301