GLOBAL - Currency managers have failed to position themselves in the market as a mainstream asset class for pension funds despite attractive returns, an asset manager has claimed.
Speaking at the Global Pensions Currency Management Forum in London, Deutsche Bank managing director and global head of foreign exchange (FX) strategy Bilal Hafeez said the marketing of an asset class is much more influential than its performance in driving schemes to allocate money to it.
Pension funds would be better off if their investment decisions relied on more rational considerations.
He said: "On a risk adjusted basis, currencies have offered superior returns to both equities and bonds since the 1980s."
Hafeez made the case for FX investment also on the basis of the higher diversification effect this asset class would provide pension funds with.
He said: "The correlation between FX and equities or bonds is low. Since 1980, equities and bonds have had a 26% correlation in monthly returns, while the correlation between individual FX strategies or FX combinations range from -25% to +7%."
Hafeez said pension funds can achieve returns by exploiting the inefficiencies in the currency market just like they would in the equities markets. He said the bulk of currency return is a beta return - simply derived by market upturns - as it happens for the equity market.
However, he said academic studies have shown the existence of statistically significant profits based on the trend-following strategies, although since the 1990s returns have fallen.
He said: "We believe macroeconomic developments that have resulted in weaker currency trends are the more likely culprit for lower returns in the 1990s, rather than the greater number of trend-followers."
He conceded up to last year currency markets saw between three to four years of bear market years. But, he said FX returns were starting to increase.
He added: "Bull markets are picking up and once they do, they tend to last four to five years. This makes currency the only asset class at the end of a bear market."
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