GLOBAL - A third of pension funds do not hedge their currency risk at all, according to the results of this month's Global Pensions 100 Panel.
Asked whether they were currently hedging their currency risk, 12.5% of respondents said they were fully hedged, 53.1% said they were partially hedged and 34.4% said they were not hedged at all.
Jean Thouvenin, managing director for business development at Millennium Global Investments, pointed out that hedging was not always necessary: “Several studies have shown that, as a rule of thumb, when a pension fund portfolio has 15% or less invested in overseas assets, the diversification benefit of the currency component is sufficiently positive that the exposure should remain unhedged.”
However, Diane Miller, principal at Mercer Investment Consulting, predicted there would be an increase in the number of pension funds hedging their currency risk: “We expect that the proportion of pension funds utilising hedging will increase as more funds recognise the risks inherent in running unhedged overseas investment exposure.”
On the 53.1% that fell into the ‘partially hedged’ category, Thanos Papasavvas, head of currency management at Investec Asset Management, said: “I am not surprised to see that most funds are partially hedged, allowing the flexibility in their processes to benefit from the diversification of currencies but also [from] the underlying [local currency] movements.”
Thouvenin pointed out that one challenge facing pension funds was deciding how much to hedge.
He said: “Once a pension fund enters the realm of accepting that the currency risk needs to be managed, the question becomes, what is the optimal neutral hedging ratio (around which an active manager can eventually deviate)?”
Miller commented: “Practical considerations mean that we don’t see many clients adopting a fully hedged position for portfolios that include equities.
“Mercer’s 2007 Asset Allocation Survey of UK pension fund clients showed that on average, clients who hedge their overseas equity exposure decide to hedge at least 60%. Our analysis shows that you can achieve most of the benefits of hedging without needing to be fully hedged.”
The Pensions Regulator (TPR) and Labour MP Stephen Kinnock and will listen to the experiences of steelworkers when transferring their pensions away from the British Steel Pension Scheme (BSPS) next week in Port Talbot.
Just Group has acquired a 75% stake in the holding company of Corinthian Pension Consulting in a bid to strengthen its professional defined benefit (DB) advisory services.
The Pensions Regulator (TPR) has exercised its production order power under the Proceeds of Crime Act 2002 for the very first time as part of a fraud investigation.
The ITN Limited Pension Scheme has named Trafalgar House as its administrator for an initial term of five years.