The Market for Mutual Fund Managers

by By Ann C. Logue

When the U.S. stock market is a mess and the dollar is even worse, investors start looking to alternatives, and this fund combines two of them: investment-grade bonds and international currencies. The Dreyfus Premier International Bond Fund's one-two punch has generated good performance for the year to date: up 8.23% (as of Oct. 19) compared to 5.80% for the S&P 500, 6.62% for the Lehman Brothers Aggregate Global Bond Index and -7.43% for the U.S. dollar relative to the euro. It can help investors generate income, diversify portfolio risk and take advantage of the decline in the value of the dollar.

The fund invests in high-credit international bonds, mostly those issued by foreign governments but including some from banks, utilities and other investment-grade borrowers. Its two largest holdings—other than cash—are euro-denominated bonds issued by Finland and the Netherlands. The fund also owns bonds issued by Japan, Brazil, South Africa and Sweden, among other nations.

The cash holdings are not trivial. Given that the U.S. dollar has been falling all year, an ordinary passbook account in another currency can be a low-risk moneymaker. It doesn't take a lot of extra performance for an international fund manager to post good profits when the dollar is weak. But what happens if it turns around, even slightly? A United States mutual fund, no matter where it invests, reports its returns in dollars, so a key decision for an international fund manager is whether to retain exposure to exchange rates or to hedge against fluctuations. The Dreyfus Premier International Bond Fund's prospectus gives the fund manager the right to determine whether or not to hedge the currency exposure. Right now, he appears to be hedging very little, and that's good. Had he been hedging, the benefit of the dollar's decline would have disappeared. The dollar can't stay at such crazy low levels forever, though, and when it turns, the fund manager needs to be able to hedge that in order to protect returns.  

This fund has a relatively low yield, 3.85%, when compared to the current 30-year U.S. treasury yield of 4.69%. Much of the interest rate differential between the U.S. and other nations is reflected in the exchange rate, because investors will buy more of a currency (bidding up the price) in order to invest in a market offering a higher yield than at home. Hence, the outlook for this fund has a few different moving parts: the relative interest rates between the United States and other world markets, the performance of the dollar relative to other world currencies, and the ability of the fund manager to navigate through it all. (The choice of high-grade bonds limits the fund's exposure to credit risk, so that's one component that investors don't need to worry about.) Still, it seems unlikely that there will be any major changes in the U.S. economy that would hurt this fund's investments any time soon, meaning the fund's relative position in terms of holdings and hedging should continue to work in investors' favor.  

This fund is pretty small right now—about $7 million in assets—which is surprising given the fund's relative performance and the general strength of the markets where it invests. It's part of Dreyfus's Premier family, so it is available mostly through investment professionals. (Dreyfus does not have a version of this fund in its no-load lineup.) The fund comes in three classes with three different load structures: Class A carries a 4.5% front-end load; Class C carries a .75% 12b-1 fee and a 1% deferred sales charge on accounts held for a year or less; and Class I carries no load and is marketed to trust accounts and qualified retirement plans.  

The big drawback is that the Dreyfus Premier International Bond Fund is relatively new. It was started in December of 2005, so it doesn't yet have two full years of performance to report. We know that the fund manager does well relative to the benchmarks in a world where the dollar is falling. We don't know what happens when the dollar improves; however, no one is expecting a big improvement any time soon.

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