By Tom Bradley

Chris, Sher and I were out meeting prospective clients last week and there were a few questions/concerns that came up over and over again. For the most part we have discussed them in the blog, but it struck me that we could be more direct in addressing them.

In this post, the U.S. dollar is the topic. There are many investors that want nothing to do with the U.S. The overwhelming consensus is that the empire is mismanaged, burdened with debt and in serious decline. It’s been a decade since anybody made money investing in the U.S. I agree with that assessment, but there are some things investors need to consider.

Like any security, there are two parts to the analysis of the U.S. – the fundamentals and the price. As noted above, the fundamentals don’t look good, but it’s never as one-sided as it seems. For instance, the U.S. government debt levels (debt, not deficit) aren’t as bad as some other countries (the UK and Japan to name two) and there are lots of potential areas for increased tax revenue – cigarettes, booze, gas and/or a value-added tax.

As for price, it would appear that the U.S. dollar already has many of the concerns factored in. The research I see indicates it’s already undervalued against most currencies. But I’m not writing to take a stand on the dollar.

If you want to protect against a lagging U.S. economy and weak dollar, here are some things you should think about:

• Even if you hate it, don’t eliminate it. You can never be sure, so you may want less U.S. exposure than your long-term plan calls for, but not none. The U.S. is a leader in sectors where Canada has few good offerings – technology, healthcare and consumer-related sectors. Every decade has different market leaders and as we flip the calendar to 2010, one or two of these may be a replacement for the current leader – commodities. And a weak dollar will actually help companies that have a majority of their revenue and profit coming from outside the U.S.
  
• Hedge the currency. There are a number of ways to hedge your currency exposure. Many of the exchange traded funds (ETFs) are hedged back to Canadian dollars and some U.S. mutual funds offer a hedged version. These types of products will protect against a weaker U.S. dollar, but there is a cost and they are not perfect, particularly in volatile markets.

To be clear, we are not recommending that you reduce or eliminate your exposure to the U.S. Our fund managers aren’t leaning that way and neither am I when it comes to asset mix. And we all steer away from currency hedging, except in rare situations.

But if you are going that way, we recommend you do it in the context of your long-term asset mix and maintain at least some exposure to leading U.S. companies.