Dodge & Cox Hedges Foreign Currency Risk
Kurt Brouwer February 22nd, 2008
(Images Source: Wikipedia)
This short piece from Morningstar [emphasis added] makes an interesting point. In fact, I think this is a pretty smart move on the part of Dodge & Cox. The venerable San Francisco money manager is hedging its international fund’s currency risk. The dollar has been declining against the Euro and the British pound for several years and now the management team apparently thinks those currencies have appreciated too much:
Fund Times: Dodge & Cox’s Latest Moves (Morningstar, February 22, 2008, Andrew Gunter)
“Dodge & Cox thinks the euro and pound may be significantly overvalued versus the United States dollar. That was the gist of a page’s worth of management discussion in Dodge & Cox International Stock’s (DODFX) 2007 end-of-year annual report. As a result, it has decided to hedge assets denominated in those currencies. Dodge & Cox came to this decision by closely evaluated the long-term fundamentals of the aforementioned currencies. Their multiyear rise against the U.S. dollar benefited absolute returns in recent years, but it also means the fund now carries more currency risk than in the past. Dodge & Cox isn’t a shop to make this sort of move without being very confident in its outlook for these currencies and a belief that they are significantly overheated…”
For more on how the dollar fluctuates against other currencies (see The Unloved Dollar and How Far Has the Dollar Fallen? And Why?).
Update: By prospectus, Dodge & Cox International can only hedge up to 25% of the portfolio. So, this announcement from Morningstar may overstate how much they are betting against the dollar.
- Economy , Geopolitics , Investing , Mutual Funds
- Comments(0)
Did you enjoy this article?
