Currency risk and new portfolio securities

The dollar and the euro reach new lows against the CHF. performance of our portfolio is cruelly affected by this since it is negative and lower than that of the market. However, if we consider the euro as the reference currency, profitability is positive and higher than the market, with lower volatility, which even goes beyond our objectives. This proves that Our problem is not with stock selection, but with currency risk, especially the strength of the Swiss franc against the greenback. So it is time to act.

We had already started to take initial steps this spring by including Swiss and European values to follow in our portfolio. However these:

• do not display as good fundamentals in terms of growing dividends as US stocks
• also suffer from the weakness of the greenback as exporting companies in the US and in countries where trade is conducted in dollars.

We had also partly modified our algorithm by considering the volatility of the securities not in their original currency, but in CHF. A low-volatility stock that oscillates in the same direction as the dollar actually gives quite significant movements in CHF. Conversely, a volatile but counter-moving stock turns surprisingly calm in Swiss francsThis measure had the merit of making certain values more attractive, in particular Coca-Cola (NYSE:KO), which we acquired in February 2011. However, while this reverse swing of the pendulum has helped reduce currency risk, we are still suffering some losses on this CHF stock because the sensitivity to the dollar is lower, but still remains.

To protect ourselves against the risk of variation in the USD/CHF pair, we must therefore rebalance our portfolio with positions which display an inverse and equivalent sensitivity to the variation of the greenback. Ideally it should even be higher, in order to counterbalance the large quantity of USD securities in our portfolio. One possibility could be to short USD/CHF on Forex. However, we do not feel comfortable with this strategy, which is purely speculative. We prefer to invest in stocks that react very positively to a fall in the greenback. Fortunately, there are stocks of this type, even among the payers of increasing dividends.

Some values of our portfolio already meet this criterion, such as VF Corp (NYSE:VFC), Sunoco Logistics (NYSE:SXL), Chevron (NYSE:CVX), McCormick (NYSE:MKC), Exxon Mobil (NYSE:XOM), ConocoPhillips (NYSE:COP), IBM (NYSE:IBM),  Praxair (NYSE:PX), United Technologies (NYSE:UTX) and Enbridge (Toronto:ENB).

We found four more:

• Ecolab (NYSE:ECL)
• Air Products (NYSE:APD)
• CR Bard (NYSE:BCR)
• Sigma-Aldrich (Nasdaq:SIAL).

These 14 titles will make it possible in the medium term to stabilize and then relaunch the performance of our portfolio in CHF. We have made some slight adjustments to our algorithm to give more weight to these “dollar friendly” values in our portfolio. The vast majority of them are now in the "Watch/Hold" position, that is to say in the future papables of the portfolio.

If they are not yet in buy signal, it is becauseIn the short term we strongly believe in a rebound of the dollar which is at its lowest historical level against the Swiss franc. It would indeed be dangerous to bet too much on a fall in the greenback to such levels, especially since we can take advantage of the strength of the CHF to buy American stocks at a good price. With this in mind, we looked for "classic" US dividend growth stocks, i.e. stocks that are not necessarily negatively correlated to the USD/CHF. We found three of interest:

• American States Water (NYSE:AWR)
• Aflac (NYSE:AFL)
• Lowe's (NYSE:LOW)

Of these three, only Lowe's demonstrates dividend fundamentals strong enough to warrant a purchase. We also acquired LOW on May 31st.A more detailed analysis of the title will appear at the end of the week.

With this dual strategy, buying US securities in the short term, then buying securities reacting inversely to the USD/CHF pair in the medium term, we are certain of finally being able to show results worthy of the name in our reference currency, the CHF, and no longer just in euros.