Super funds adopting sophisticated currency overlay strategies will not only avoid the “double-whammy” of declining international equity prices and an appreciating domestic currency but are likely to add value too, according to president of FX Concepts Asia Pacific, Robin Golding.
“Active currency management has not really changed for over 20 years, however some managers have moved beyond simple currency risk management and are now seeking to add value.”
Golding says that currency risk itself can be managed by simple hedging, but sophisticated forms of currency management such as cross-hedging, which allows managers to move into other currencies within the MSCI, and the more recent cross-hedging of currencies outside the MSCI and into high-yielding currencies, can add value.
“This kind of active currency management allows funds to take advantage of, not only the manager’s ability to pick currencies that will perform stronger but also those that will yield higher due to higher interest rates,” he says.
Currency and its management have had an increasing influence on super fund returns in recent years. Initially this was a positive influence though in recent times currency has had a significant negative impact on fund performance.
“The double whammy of falling international equity prices and a weakening US dollar have come at a time when funds have been increasing their exposure to overseas shares, most have increased to 20 per cent with many having between a 20 to 30 per cent exposure to international equities.”
“Funds need to be prepared for different eventualities with currency so that they can manage the risk inherent with it, and the only way they can do that is by having an active currency manager.”
