To hedge or not to hedge?
At the SPF, the Dutch railways pension fund in Utrecht, Bruus Jan Willemsen, the fund’s full-time currency manager, says the fund has a developed strategy under which it has defined the percentage of the exposure it wants to certain currencies.
“As these positions are usually quite low, it means most of our positions are hedged. We have also defined upper and lower ranges within those percentages, giving us a little room to play. So if the fund takes a view on a currency, it can increase or reduce its exposure positions as appropriate.”
Though the fund has had a foreign exchange strategy since 1995, this new strategy coincided with the euro’s advent and applies to about 30% of the fund’s assets, and about 80% of this can be hedged.
For the Telecom Eireann pension fund in Dublin, the arrival of the euro has reduced its currency exposure, as its liabilities are designated in the new currency, where 70% of its assets invested, says Ciaran Naughton, investment director. The balance of 30% in non-euro assets is invested through the fund’s external managers. “We have told them that currency hedging or forward currency dealing is limited to the foreign investments held in the portfolio. They report to us when they are doing this, and we have never had to constrain any manager in what they have done here. But at any one time, hedging is unlikely to be more than 2 to 3% of the portfolio, which equivalent to around 10% of the non-euro assets. “Hedging is not an ongoing feature,” he stresses, “but usually a response to whatever is happening in the currency markets.”
Consequently, the portfolio is normally on a non-hedged basis, says Naughton. “But if there is a hedge, we monitor the position to assess its financial impact. But we are not aiming to make money from currency management.” Fennell Betson