Swiss question value of hedging
Daniel Gloor of the Sfr17.5bn (e10.9bn) Canton of Zurich Insurance Fund says euro implementation has meant that the four main EU currencies the fund invested in have shifted into the single currency, so realistically changing currency management very little since the beginning of the year.
“We previously had a currency overlay programme with regard to foreign bonds in sterling, yen and US and Canadian dollars and five European currencies.
“The euro has cancelled out the continental quota this year and at the moment we only hedge against the US dollar and the pound which make up 25% and 15% of our bond portfolio respectively, and we currently have no yen holdings.
“The foreign bonds including convertibles come to 22.6% of the fund assets and we have hedged over the last five years to stay safe, but it doesn’t add value. We don’t hedge the convertible bonds or equities, though, because we have 25% of our total assets in a fluctuation reserve which gives us a fairly comfortable position.”
Jean-Pierre Gloor, general manager of the Zurich based Sfr6bn (e3.7bn) SAirGroup pension scheme for airline workers (excluding pilots), says that although the scheme invests in US and euroland securities the holdings are not significant enough to warrant specific currency risk management.
“We don’t see the need to hedge because the risk is not great at the moment. We only have around 2% in US bonds and 5% in eurobonds, and all our liabilities are in Swiss francs. Of course there is a risk in equities, but we don’t consider it as a big one.” He adds that the fund is presently planning to up its overseas allocations and says there may be a currency strategy to follow depending on the risk taken.
Christoph Schenk, CEO at the Sfr5.2bn (e3.2bn) Baden-based Asea Brown Boveri pension plan, says the fund manages currency risk through diversification because of the lack of precision on managing currency risk.
“We don’t have an active currency management strategy because the whole issue is rather cloudy. If you look at the literature it is clear that you have to look at currency as a separate asset class. The question is whether diversification pays here, and you can easily get 30 different opinions on the subject.
“ If you have a small foreign exposure it is said you shouldn’t hedge. With larger portions you should partially hedge apparently. In the end the evidence doesn’t seem to be very clear though.”
And Schenk notes that hedging costs. “We like to have an academic approach based on hard facts for our investment, and there aren’t any for currency management.”
He also questions how many good currency managers there are in the world, stating that he can barely think of any off the cuff.
“ Furthermore, what does a partial hedge bring?” Schenk asks. “In the end it is a question of asset liability management and we find that diversification pays. If you look at the issue on a ‘white noise’ basis, meaning zero expected return and constant volatility, and you are a pension fund thinking in terms of 20–30 years, then why should you hedge? It would only make sense if you had a time horizon of one, three or five months.”
“Over the long term the parity and purchasing power shifts, so you would have a problem with the hedge because you lose more then gain more. Hedging doesn’t help.” Hugh Wheelan