The weak U.S. dollar has been a boon to one class of mutual funds: those that invest in foreign currencies.
The currency funds, which invest in short-term, fixed-income securities denominated in one or more foreign currencies, rose 9.2 percent, on average, for the year through June, with the biggest winner, Fidelity Yen Performance, up 13.8 percent. That compares with a 6 percent loss for the world bond group, according to Morningstar Inc.
The world bond funds tended to make money on currency changes, but those gains were wiped out by losses caused by rising interest rates in most countries. A currency fund is essentially a money market fund that invests overseas.
But currency plays are extremely risky, said Eileen M. Sanders, a Morningstar analyst, and are best left to speculative traders.
Currency investors make money as currency exchange rates move because of shifting supply and demand by global investors, as well as trade flows.
This year, the dollar has fallen below 100 Japanese yen for the first time ever, and has lost ground against most European currencies.
The winning formula is to predict correctly which of the world's currencies, if any, will appreciate vis-a-vis the dollar -- and that's not an easy thing to call.
From 1988 to 1993, the currency funds underperformed world bond funds every year except one. In 1990, the currency group rose 20.5 percent, on average, compared with 12.8 percent for world bonds, and the biggest winner -- Fidelity Sterling Performance -- gained 36.5 percent.
There are six currency funds, each occupying its own niche, some for one currency and some for a basket of currencies. Because the funds are so dissimilar, decisions to invest "wouldn't be based on past performance, but on what exactly you wanted to accomplish," Ms. Sanders said.
Fidelity Investments offers three currency funds: its Sterling, Deutsche Mark and Yen Performance portfolios. Each carries a sales load of 0.4 percent and annual expenses are temporarily capped at 1.5 percent, with Fidelity absorbing any extra expenses.
The Fidelity funds are pure currency plays, aiming to approximate the performance of their relative currencies to the dollar by investing in short-term money market instruments. The funds mostly use "synthetic" positions in foreign currencies via options, futures, forward contracts -- agreements to exchange a specified amount of one currency for another at a specified date.
The funds were set up in 1989, but together the three only hold $13.8 million in assets with the largest, the Deutsche Mark fund, holding $6.9 million.
That is partly because Fidelity does not "advertise or aggressively market the funds for fear that we would potentially attract the wrong investors," said Neal Litvack, executive vice president of marketing. He said investors should have "a lot of time and interest in closely tracking the markets, as well as a very high tolerance for risk."
The other three currency funds are run by Franklin/Templeton, which acquired them from the Huntington group in November. )) They are sold with a 3 percent sales charge and annual expenses of roughly 1.3 percent. Unlike Fidelity's, these are diversified funds marketed to the average investor.
The $55.4 million Franklin/Templeton Hard Currency Fund owns currencies of the five lowest-inflation countries, now Denmark, Japan, New Zealand, Canada and Australia, plus Switzerland. It performs best when the U.S. dollar falls.
Franklin's $17.9 million High Income Currency Fund does best when the dollar is stable. It owns 10 of the highest-yielding currencies in the developed markets, those of Belgium, Britain, Denmark, France, Germany, Italy, the Netherlands, Spain, Sweden and New Zealand.
Up to one-quarter of the fund can be invested in emerging markets; this portion so far includes only Greece, but manager Neal Devlin plans to add Thailand and Singapore.
The $52.2 million Global Currency Fund invests anywhere in the world and aims to maximize total return through interest income and currency gains. Today, it owns mostly marks (50 percent), yen (22 percent) and New Zealand dollars (15 percent).
Franklin says that international currency investments such as its funds can protect against a widespread decline in the U.S. dollar. True, but you can get the same protection by investing in an overseas bond or stock fund that does not hedge its currency exposure, such as the T. Rowe Price International Bond Fund, down 2.3 percent through June, compared with the 6 percent loss for all world bond funds.
And while that introduces equity or duration risk, accepting money market returns over the long term is not likely to be very profitable.
Franklin also promotes the international diversification its funds provide. But owning shares in overseas stock or bond funds, or domestic funds with overseas holdings, would achieve the same thing.
So far this year, with bond markets suffering in most countries and stock markets mixed, the total returns from currency funds have been good. But in the longer term, stocks and bonds tend to do better.
In the short run, though, investors who want to gamble on currency movements could win -- or lose -- a bundle.