* Has relatively large short positions on euro and yen
* Owns 1-3 year US, European govt bonds through ETFs
* Sees commodities as best exposure to emerging economies
By Kevin Lim
SINGAPORE, May 26 (Reuters) - The euro will continue to fall and interest rates will stay low as European governments slash spending and economic growth lags other parts of the world, according to a global macro fund manager at Legg Mason.
"We think the euro will continue to weaken," investment director Ajay Dayal said at the Singapore launch of the Legg Mason Permal Global Absolute Fund, which aims to provide annual returns of 8-10 percent regardless of how markets perform.
The other main assumptions driving the fund's investments are that developed economies will not raise rates as quickly as the market expects and that commodities are the best way to bet on continued strong growth in emerging economies, he said.
The euro has fallen by over 20 percent against the dollar since the start of this year, and Dayal said there could be further downside given Europe's growing debt burden and likelihood of new problems emerging on the continent.
"If another European bank goes down or if another European country goes down, we might decide to hold on a little bit longer," he said, adding the fund currently has relatively large short positions on both the euro and the yen.
Dayal said the fund is invested in 1-3 year U.S. and European government bonds via exchange-traded funds (ETFs) as it does not expect their central banks to raise rates anytime soon.
As for emerging markets, the fund is tapping the growth through exposure to commodities and an ETF that track the stocks of global consumer staple firms such as Tyson Foods.
The Legg Mason Permal Global Absolute Fund, which is aimed at retail investors, returned 2.67 percent between the start of 2010 and end-April, and is up 3.45 percent since it was set up about seven months ago.
Legg Mason launched the fund in Singapore on Wednesday and plans to offer it to retail investors in Hong Kong and Taiwan.
According to data from Legg Mason and Lipper, a unit of Thomson Reuters, the Global Absolute Fund is about 20 percent invested in 1-3 year U.S. and European government bonds.
The fund's other large holdings include gold, hedge funds with macro and event-driven strategies, and an ETF that tracks dollar-denominated corporate bonds.
The fund increased its cash holdings from about 1 percent at end-March to 15 percent at end-April, and its exposure to European equities fell to zero from 5.1 percent at the end of last year.
Dayal said Legg Mason favoured Japanese and frontier market equities because they have become cheap relative to stocks elsewhere following a correction in global markets.
"Japanese companies have cut cost, they are still as efficient as before and they are cash-rich," he said. (Editing by Lincoln Feast)