The Trend Spotters

To determine whether a currency is overvalued or undervalued, the managers use the economic concept “purchasing power parity,” which compares the cost of goods and services among countries when currency translation is taken into account. “The price of goods has got to be roughly the same from country to country,” says Singer. “If it is not, there is an imbalance that can be acted upon.” The fund goes short on currencies that appear overvalued and takes long positions in those that appear undervalued.


At current levels, the fund is taking a neutral stance on the U.S. dollar relative to other currencies. “Two years ago, we took the position that the dollar was cheap, but since then it has rallied strongly against the euro, yen and other currencies. The market view is that the U.S. dollar will continue to gain strength. Our view is that the dollar is fairly priced because the market has already priced in monetary policies in the U.S. and other countries.” The fund is short in other developed market currencies such as the Swiss franc, euro and Australian dollar, but it’s long on the Indian rupee and Chinese yuan.

Equities: Value Scarce In The U.S.
Over the last two years, the fund’s exposure to the U.S. stock market has dropped by two-thirds. The only sizable long position is in U.S. large-cap value stocks, and the fund is short in the large-cap growth and small and micro-cap areas. After combining the positive long and negative short positions, the fund’s exposure to U.S. stocks is close to zero.

The reduction in U.S. equity exposure began about two years ago as a result of discussions Singer and Clarke were having with global investment managers. “There was a broad perception that the U.S. equity markets were the only source of stability,” Singer says. “That was a signal to us that U.S. equity prices were going to get pushed beyond fundamental value. And that is what is happening.”

On the other hand, Europe and Asia emerging markets, two areas where concerns about economic growth are greater, offer better equity values. Because European companies do business around the world, the economic struggles of their home countries have a muted effect on their bottom lines, yet the stocks are selling at decent valuations. And because companies in Spain and Italy have been lumped together as risky southern European bets, thanks to problems in neighboring Greece, their equity values are particularly attractive.

Nonetheless, the fund has reduced its European position over the last few months because of Greece’s struggles. “The high-risk brinksmanship maneuvers with Greece will lead to a destabilization of the European equity markets,” Singer cautions. “We may increase the position once the dust settles and markets have begun to recover.”

On the other hand, the managers have increased emerging market positions significantly over the last year. China, where concerns about economic growth have kept a lid on stock prices, represents the largest position in this part of the portfolio. The fund is also long on equities in India, Russia and Korea. But there is no exposure to the Latin American markets, which Singer considers overvalued.

Fixed Income: Lots Of Red Flags
Around the world, bond yields remain artificially depressed as central banks in Europe and Japan continue to keep demand stable through bond-buying programs. While the U.S. Federal Reserve stopped buying bonds in 2014, a weak economic recovery is keeping yields artificially low.

In this environment, the fund is cautious about the fixed-income market and has negative net exposure in Germany, Japan and other countries where bond yields are in negative territory. “It’s astounding to me that in many countries you have to pay interest to lend money,” says Singer. “In that kind of environment, we are short fixed income in a number of European markets.”

Even though interest rates are low in the U.S., they are still in slightly positive territory, and the fund’s long positions in fixed income are concentrated in U.S. securities. Singer believes the Federal Reserve is likely to wait until at least December before it begins raising rates and that any increase is likely to be “slow and measured.”