SWITZERLAND - Active currency overlay strategy has received a resounding thumbs down from one leading pension fund consultant.
Alfred Buehler, a partner at Zurich-based consultant PPC Metrics, said: “We do not think a pension plan should do active currency management.
“It’s very difficult to forecast any currency movement. Most currency overlay managers are just replicating options. They have a model that tells them when they have to sell the currency. You are buying something you don’t really get anything out of.”
Currency overlay strategies look to control risk on foreign currency exposure, while some fund managers, such as Gartmore, look to generate alpha on existing currency exposure.
James Binny, senior investment manager with Gartmore, explained how investors could be missing out on latent returns.
“From a risk perspective leaving currency unhedged is an ‘unrewarded risk’ - i.e. unhedged currency adds risk to a portfolio risk without any real benefit,” he said.
“Therefore it is sensible to manage such risks. The argument from a return perspective is even stronger. Where consultants have assessed the results, the active management of currency would appear to be a more consistent source of return than the active management of most other asset classes.”
Binny added that there are various techniques used by currency managers, only one of which is option replication which is most applicable to risk control.
“As the return generation properties of currency management have become more accepted, there are few managers whose only focus is option replication.”
Swiss Social Security compensation fund AHV/AVS has been using currency overlay with some degree of success since last April.
The fund employs three managers - Bridgewater, Pareto and State Street - to overlay its global bond portfolio worth SFr2bn (E1.4bn).
Manager Dominique Salamin has chosen to hedge away his currency risk: “We don’t think there is a positive risk premium for the investor to take a currency risk.
“There is no reason why a Swiss investor buying dollars should get a risk premium and the US citizen buying Swiss francs should get another risk premium.
“Currency is a zero sum game, so it makes sense to hedge risks which are not systematically rewarded.”
He added: “We were convinced we were able to find good active managers and therefore we selected specialised institutions to manage the currency risk.”
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