Pension funds scramble for foreign exchange management

The low growth offered by equities recently and the sharp fall seen by the dollar this year has led pension funds to focus on how they manage their currency exposure. Bill Muysken, global head of research at Mercer Investment Consulting in London, said for the year to date Mercer has seen 20 clients asking for advice on currency compared with just four for the whole of 2003.

Anita Higgins, director of institutional business at BGI, said the group's currency funds now run £27 billion of assets compared with £5.8 billion in 1999. She reported significant interest in a currency-hedging fund BGI launched last year. Aimed at small and medium-sized UK pension funds, it offers hedging against the average UK pension fund's overseas exposure.

The UK's Record Currency Management has seen a big increase in demand for its services that are tailored to pension funds. Chief executive Neil Record said funds under management doubled in the year to July to $16 billion. He noted the recent devaluation of the dollar has ignited an interest in controlling currency risk. He said the dollar’s fall to $1.90 to the pound hindered equity managers’ efforts at effective stock selection, instigating demand for stripping this risk out.

Muysken said the two main factors driving demand for currency management are a reduction or risk linked to holding equities listed in different world currencies, and a desire to add value by delivering returns through active currency management. While a greater proportion of US pension funds traditionally used some form of currency overlay, interest there has dipped as it has grown in the UK, he added.

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