Sunday, July 29, 2007

Defensive Strategy Update

Perhaps I'm better at thinking about defense when I'm no longer invested defensively.

This week I discovered a great defensive pairing right under my nose: The Currency Harvest fund (DBV) and long-term US Treasuries (TLT). It's preferable to have defensive funds whose movements aren't correlated day-today, and it's ideal if they are actually anti-correlated. Since it was launched last year, DBV has been about as anti-correlated with TLT as one could possibly hope for.
As the above chart shows, one could have purchased the DBV+TLT pair at almost any time in the last 10 months without suffering any significant short-term loss. Each one of the "D"s on TLT's chart is a dividend payment which amounts to a 5% annual yield, so the average gain of the pairing is 10% (16% DBV with 4% TLT dividends) in less than one year.

At this point I'm not sure exactly why they are anti-correlated, since DBV doesn't place any bets on the U.S. dollar or U.S. bonds. It may simply be that any time global investors move out of U.S. bonds, they move in to bonds in other high-yielding countries - and vice-versa. Whatever the reason for this relationship, the DBV+TLT pairing will be the core of my next defensive position.

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