The Franklin Templeton Hard Currency Fund, the oldest U.S. mutual fund that bets against the dollar, had a successful run during the past...

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The Franklin Templeton Hard Currency Fund, the oldest U.S. mutual fund that bets against the dollar, had a successful run during the past three years as the dollar lost value. So far, 2005 has been a different story.

The 16-year-old fund is down 3.4 percent this year as the U.S. currency has rebounded against other currencies, including the euro and Canadian dollar, its two biggest holdings. But Michael Hasenstab, the $207 million fund’s co-manager in San Mateo, Calif., says deep-rooted economic problems such as the bloated U.S. trade deficit will push the dollar lower again over time.

“There’s a bit of a disconnect between fundamental developments and short-term movements in the dollar,” he said.

Hasenstab and co-manager Alex Calvo have more than a rising dollar to contend with. Their fund also faces competition from a batch of new rivals. ProFund Advisors, Rydex Investments, Merk Investments and Potomac Funds are lining up to offer six new U.S. currency funds, four of which are designed to go up when the dollar goes down.

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Demand for such funds faltered in the late 1990s, when both U.S. stocks and the dollar were rallying. Franklin tried to merge its Hard Currency Fund with another fund in 2001, after assets fell to $33.6 million in October 2000. Fidelity Investments, the world’s biggest mutual-fund manager, closed three U.S. currency funds in 1997, citing insufficient demand.

Currency funds are emerging again as mutual-fund companies seek new ways to attract investors as stock prices stagnate.

“Exchange rates are an entirely different asset class,” said Paul Montgomery, an investment adviser who oversees about $75 million for 50 clients at Montgomery Capital Management in Newport News, Va. “It gives an opportunity to hedge and also to make money.”

Asian focus

Franklin’s managers expect the next round of dollar declines to come mainly against Asian currencies.

“If we look at where our trade imbalances are, they’re with Asia,” Hasenstab said.

The euro is still the fund’s top holding, at 17 percent of assets as of March 31. That is down from 27.5 percent a year earlier. The Singaporean dollar is now the third-biggest holding, at 11 percent, and wasn’t in the top five a year ago.

Asian currencies, plus currencies of Australia and New Zealand, are about 46 percent of the portfolio.

Asian nations such as South Korea also may welcome some strength in their currencies as a way to restrain inflation, Hasenstab said.

History lesson

This year’s decline in the Franklin fund compares with the Citigroup Treasury index’s 2.3 percent return as of May 24 and the 0.8 percent drop of the Standard & Poor’s 500 index.

The Franklin fund’s average annual return was 11.9 percent during the past three years, beating the 6 percent average gain of the Citigroup index and the 4.3 percent average return of the S&P 500.

History shows that getting investors to buy currency funds hasn’t been easy. Assets in the Franklin fund, while up sixfold since 2000, are still about a quarter of the average U.S. stock fund, according to statistics from the Investment Company Institute, a trade group in Washington, D.C.

“Going into a currency fund for most people is akin to gambling,” said Kunal Kapoor, an analyst at Morningstar, an industry research firm in Chicago. “It’s not the kind of exposure a regular retail investor really needs to have.”

Hasenstab disagreed. A currency fund is “a very good diversifier in an overall portfolio,” he said.