UK - Pension funds that invest in currency should choose active over passive management and hedge at least part of their exposure, says Bill Muysken, global head of research at Mercer Investment Consulting.
Talking to delegates at Global Pensions’ currency management forum in London, Muysken said: “There is a strong case for active rather than passive, with a couple of provisos. Some managers are better at active currency management than others; and nothing is certain in investment - set limits on the scope for active currency management in keeping with your tolerance for short-term underperformance.”
He added: “There seems to be value being added on average by active currency overlay managers.”
Muysken said Mercer generally recommends 75% hedged benchmarks for UK pension funds.
“In almost all cases for UK pension funds we recommend some degree of hedging makes sense from a longer term risk-return perspective,” he said.
Penny Green, chief executive of the £11bn Superannuation Arrangements of the University of London (SAUL), stood by the benefits of currency overlay despite the fund losing some £5m in assets since appointing a manager in March last year.
Green said the fund opted to appoint a currency overlay manager a year ago for alpha generation rather than risk control but since then the £23m mandate awarded has reduced to £18.7m. Despite the diminution in asset value, Green said the decision must be looked at in a long-term context.
“We have not seen the anticipated rewards but are taking a long-term view,” she said.
“Whilst our experience has been disappointing... any pension fund that is an immature pension fund and is not repatriating assets overseas is not doing their job properly if they haven’t at least considered currency overlay because in the long term it will add value and that’s what we should be doing in this day of defined benefit deficits.”
The British Medical Association (BMA) has warned chancellor Philip Hammond to reform the NHS pension scheme rules or doctors will reduce their working hours.
The lifetime allowance should be scrapped and replaced with a lower annual allowance, last week's Pensions Buzz respondents said.
Action for Children Pension Fund has outsourced its pensions administration to Trafalgar House.