Pension fund managers should develop a currency policy separate from their asset allocation policy, attendees at the GP Currency Management Focus heard.
An attendee asked the panellists at the London event if a foreign exposure strategy should be separate from the asset allocation decision.
David Rae, director of overlay strategies for EMEA at Russell Investments said it should.
He said: “I would advocate separating those decisions in the first instance and thinking about them as very separate decisions. So the first one is, do (you) want to get an exposure to the equity markets or debt markets of those emerging economies? And then separately, do I want to generate exposure to the currency within those markets?”
He said the third decision the investor should make is whether or not to bring in a currency manager to manage the portfolio’s exposure to currencies.
Michael Shilling, chief executive officer of Pareto, agreed adding he views it as a risk management practice.
“If I take a risk management approach, I’d start off with the same statement; you want to separate these two activities. But I would think of it as, first of all, managing a pre-existing risk and figure out the best way to manage this, because it’s not in itself rewarded, to improve the quality of the portfolio. So it’s a risk management, risk-reducing exercise,” said Shilling.
He said the investor can then free up some risk budget to use in alpha-generating investments.
Currency in the developed markets is often viewed as a zero-sum game, but Rae said there could be scope in emerging markets currencies to generate returns.
“There are arguments in emerging market currencies that (a zero-sum game) isn’t the case and there is a premium associated with allocating to the emerging markets even before you start applying active management in that space as well,” he told attendees.
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