John Baur: Global currency fund manager points to risks, exposure

If you happen to be like most Americans and have 95% of your investments denominated in U.S. dollars, you might benefit from getting to know John Baur.

The former mechanical engineer and current bird-watching hobbyist has his finger on the pulse of the global currency markets. He manages the $500 million Eaton Vance Diversified Currency Fund (EAIIX), assets in which have grown by more than 40% since the start of the year.

Even though the asset flows suggest strong interest in this kind of strategy, Mr. Baur, 43, is well-aware that most investors give almost no thought to their currency risk and exposure.

Big mistake, he contends.

“The current monetary policy in the U.S., with interest rates at zero and the Fed expanding the balance sheet, is not good for the dollar,” he said. “As a result of the U.S. policies over the past five years, the dollar is set for a decline against currencies where governments are doing a better job.”

The fund’s strategy essentially involves buying foreign government bonds in the local currencies, but the key is the how and the why it is done.

Take the Mexican peso, for example. Mr. Baur became bullish on the peso following the June election of a more reform-minded government. The new leadership took power in December and already has passed labor and education reforms. Next on the agenda are reforms to the country’s energy market.

“All of this means you can expect economic growth potential to increase over the medium to long term, and with that, we would expect the peso to appreciate against the dollar,” Mr. Baur said.

LOTS OF CHOICES

Globally, there are more than 50 liquid currencies in which Mr. Baur and his team could invest, but he tends to focus on about 40 primary currencies, “because we’re focusing on the better currencies in terms of investment opportunities.”

Two he tends to avoid are the euro and Japanese yen because he sees them both as sources of volatility and not as sources of return.

“Those two currencies represent some of the most efficient places in the universe in terms of liquidity and volume, and we don’t think we have an advantage in predicting the direction of the euro or the yen,” he said. “We try to make investments in places where we think we have an advantage.”

The euro actually is held in the fund as a short position to hedge the currency risk that comes with owning certain European bonds, he said.

“Comparing U.S. policy to European policy, they look the same, and neither one is very good,” Mr. Baur said. “But if you compared policy in the U.S. to Mexico, where they run something close to a balanced budget, where the monetary policy rate is at 4% and inflation is below that, there are positive real interest rates.”

Mr. Baur joined Eaton Vance Management as an analyst in 2005, covering Latin America before becoming a portfolio manager in 2008. He earned a bachelor’s degree in mechanical engineering from the Massachusetts Institute of Technology, where he also played soccer (“We weren’t very good.”). Before going back to school to earn his master’s degree in business administration, Mr. Baur worked for seven years as an engineer at Applied Materials Inc.

Bird watching is something he started doing in high school.

“Any chance I get, I look for birds that I can identify,” he said. “I’ve seen over 1,200 different species out of 10,000 in the world.”

The fund, not unlike Mr. Baur himself, has a somewhat eclectic background.

Originally launched in 2007 as a developed-markets-bond strategy, the fund has undergone three name changes to reflect an evolution that has afforded the management team increasing flexibility.

The fund has gained 56 basis points since the start of the year, which compares favorably with a 7-basis-point gain by the benchmark Bank of America Merrill Lynch USD LIBOR 3 Month CM Index and a 43-basis-point decline over the same period by the currency fund category as tracked by Morningstar Inc.

The absolute performance might not impress everyone right now, but investors moving into these kinds of strategies are doing it mostly with an eye on interest rates.

“When interest rates rise in the U.S., it will be good for this strategy,” Mr. Baur said. “The school of thought says that higher rates lead to a stronger currency, but I think that’s too simplistic, because it will depend on why rates are rising.”

jbenjamin: @investmentnews.com Twitter: @jeff_benjamin

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