When Axel Merk decided to convert his investment advisory business into a mutual fund company in 2005, his friends told him he was nuts.
“There are thousands of products out there, and they said if I didn't grow assets fast enough, the fixed costs would quickly put me out of business,” said Mr. Merk, who launched his flagship Hard Currency Fund that year with just $1 million in assets and a couple of dozen clients from his former advisory business.
He's still around.
Mr. Merk's flagship fund has grown to $550 million in assets and has about 40,000 beneficial owners.
Performance hasn't been his central marketing point but rather the fact that currencies, on which the firm focuses, have low correlations with stocks and bonds.
“We're not trying to get a 20% return,” Mr. Merk said. “We offer investors uncorrelated alternative assets, and we think it's unnecessary to take excessive risk.”
Mr. Merk also credits the fund's simple investing strategy — using no leverage and rarely taking short positions — for its ability to attract investors. The fund holds a range of short-term-debt securities, with an average duration of less than six months.
“We're really at the cash end of things,” he said.
Mr. Merk minimizes credit and interest rate risk to keep moves in currency exchange rates the driving factor behind performance. When he does something unusual — such as his recent exit from eurozone currencies — he announces it to the market promptly.
“All our securities and derivatives positions are disclosed on a monthly, if not daily, basis,” Mr. Merk said.
That transparency served him well during the financial crisis, when so many investors were burned by what was held in their funds without their knowledge.
Although 2008 was a nightmare for many fund managers, it was a watershed year for the Hard Currency Fund, which lost less than 5% and increased assets by 35%.
“We stuck to our investment objectives. Our investors are never surprised with how we move their assets,” Mr. Merk said.
Hard currencies, according to Mr. Merk, are those backed by sound government monetary policies.
“We look at a gamut of things, but the less money a country prints, the more we like them,” Mr. Merk said.
It is no surprise then that he is now “100% negative” on the U.S. dollar. In fact, Mr. Merk has never had more than 1% to 2% of the fund invested in U.S. dollars, though there is nothing in his fund prospectus that precludes him from doing so.
“[Federal Reserve Chairman Ben S.] Bernanke is trying to debase the dollar,” said Mr. Merk, who sees little chance of a political solution to the country's fiscal situation and expects further weakness in the U.S. dollar.
“We think it's unlikely that the politicians will fix the entitlement programs,” he said. “Inflation is the most likely path.”
Mr. Merk recently sold his eurozone exposure because Mario Draghi, president of the European Central Bank, now seems inclined to use monetary inflation to help eurozone institutions and economies when needed.
Mr. Merk's favorite investments are the Singapore dollar, which he said correlates with the euro but “without the tail risk,” and the New Zealand and Canadian dollars.
He also holds a substantial position in SPDR Gold Shares.
“Gold is the ultimate hard currency,” Mr. Merk said.
The success of the Hard Currency Fund has spawned new fund offerings, including the Absolute Return Currency Fund (MABFX), the Asian Currency Fund (MEAFX) and the Currency Enhanced U.S. Equity Fund (MUSFX), which seeks to outperform the S&P 500 by managing currency risk.
Mr. Merk also has filed to launch an exchange-traded-fund version of the Hard Currency Fund, as well as a gold ETF that will offer investors the option of redeeming their shares for gold bars or coins. The unusual feature is being offered because of investors' concern about the synthetic exposures to gold that other ETFs often construct.
His methodical, no-surprises investing style contrasts with an entrepreneurial bent when it comes to his career path. An economics major in college, Mr. Merk earned a master's degree in computer science from Brown University in 1992.
The native German left a Ph.D. program in computer science in London and launched his investment advisory firm in Switzerland in 1994. Seven years later, Mr. Merk decided to move his firm along with his family to the United States.
“We looked at several places and decided on the [San Francisco] Bay Area. The entrepreneurial spirit is abundant here,” Mr. Merk said.
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