Great Plays for a Weak Dollar

With the greenback hitting a new low practically every other day, U.S. travelers are finding it increasingly costly to visit England, continental Europe, Japan and other foreign lands. But what hurts your wallet when you travel can be a blessing when you invest. One way to capitalize on the diminishing dollar is to buy into an overseas bond fund.

These funds benefit when the dollar weakens because money invested in pounds, Euros, yens and the like gets translated into more bucks. The same is true of foreign stock funds, but overseas bond funds should be more stable. Of course, bond funds, whether they invest in U.S. or foreign IOUs, are subject to interest-rate risk -- bond prices move inversely with rates -- and credit risk (the possibility that a bond's issuer could default).

One top-notch foreign-debt fund is T. Rowe Price International Bond. Manager Ian Kelson stuffs his fund (symbol RPIBX) with government debt of foreign nations. The fund owns no dollar-denominated debt and doesn't hedge its foreign-currency exposure, so it is virtually a pure-play on a weak dollar.

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Although Kelson is permitted to hedge the fund's currency risk, "we've made a philosophical decision that people invest in this fund because they want that currency exposure," he says.

Kelson and his colleagues make investment decisions on the basis of big-picture economic analysis. Kelson, based in T. Rowe Price's London office, and co-managers Chris Rothery and Mike Cornelius develop opinions on the economic conditions, currencies and bond yields of various nations. Three additional teams, dedicated to foreign high-yield (or junk) debt, investment-grade corporate bonds and emerging-market IOUs, also contribute research to the fund. However, each one of those components makes up less than 10% of the portfolio.

Kelson says that despite the dollar's already sizable six-year-long decline, he's still bearish on the buck. He anticipates that the housing slowdown will seep into employment and consumer spending figures -- a development that would almost certainly prompt the Federal Reserve to initiate additional short-term rate cuts. Low interest rates and a weak economy are a prescription for encouraging investors to move money abroad, which would further devalue the dollar.

The fund's 8.1% year-to-date gain through October 19 is at the top of Morningstar's "world bond" category. Kelson says the $2.2 billion fund performed well in the third quarter, during which it gained 6.7% because of low stakes in corporate debt, both investment grade and junk. International Bond's emerging-markets holdings rebounded strongly after taking a beating in August, he adds. The fund's 9.1% annualized return over the past five years beats the category average by an average of one percentage point per year. The fund charges 0.84% in annual expenses and currently yields 3.8%.

Another fine option, though not as pure a play on a weak dollar, is Loomis Sayles Global Bond. Co-manager Dave Rolley says the $870 million fund currently has exposure to 22 foreign currencies. But the fund's largest currency position, at more than 40% of assets, is in the dollar.

Global Bond (LSGLX) focuses less on government debt than the Price fund, so analysis of individual securities factors more heavily into the investment process. Rolley and co-managers Ken Buntrock and Lynda Schweitzer build on the research of a 40-person team that focuses exclusively on global corporate debt. The trio balance security analysis with top-down economic analysis.

Rolley, like Kelson, is particularly bullish on Asian currencies, which he expects to strengthen versus the dollar.

Global Bond returned an annualized 9.8% over the past five years, an average of two percentage points per year ahead of the typical international bond fund. The fund yields 4.0% and charges 1.10% in annual expenses.