The pension fund of Belgacom, the Belgian telecommunications company, which is the country's largest pension fund with assets over BFr80bn ($2.16bn), says the most pressing issue in terms of the euro is how they will operate the new currency against exposure to the yen and dollar.

Philip Neyt, general manager of the Belgacom pension fund, explains that the US and Japan will continue to be the mainstay investment markets outside Europe for the fund, reflecting an already well diversified portfolio due to sectorial limitations in the domestic market.

Presently, Belgacom operates a fully hedged currency strategy against the deutschmark, for both equity and bond holdings, due to its large exposure in the German market.

Managers are permitted to deviate from this position though if they feel they can add value, provided they stay within the tracking area defined by the mandate.

Neyt concedes this philosophy is rather passive", whilst emphasising however that Belgacom selects its asset managers for allocation skill and not currency management.

Foreign investment is limited to OECD countries, where currently currency overlay is kept to a minimum.

"We do not permit our managers to carry out any cross-hedging. If one of our managers is negative on the yen against the dollar, for example, then they cannot overate the dollar against it.

"Furthermore a manager cannot hold more currency exposure than the value of the underlying assets. At Belgacom, an investment manager cannot say they feel comfortable with the dollar but negative on the US market, as these are separate issues for us at the moment," Neyt says.

The Belgacom fund is currently in the process though of deciding how this currency strategy might change in the future, with Neyt stating the biggest question to be that of whether they should see currency as an asset class in its own right.

He maintains that currency overlay at Belgacom is first and foremost a safeguard for reducing risk, but adds that the fund would be foolish to overlook hedging as a means of enhancing returns.

Belgacom's approach though is cautious, and they are looking to pension funds in the Netherlands to see how they have fared with such currency management strategies.

"We believe the proof of the pudding is in the eating and so we are looking to Dutch funds which have experience in adopting 50% hedges against the benchmark, as well as listening to the claims of currency overlay managers, before we make any concrete decisions.

"We wish to make our currency management strategy optimal, but above all, safe," he adds.

Any decision taken, Neyt says, will also be looked at in terms of the UK gilts and Danish bonds Belgacom holds, to decide whether hedging is appropriate against sterling and the Danish krone.

He expresses reservations though that the decision making process for currency management is often not as rigorous or as strongly underpinned as that for securities selections.

"What we don't want is a situation where we move to more ambitious currency management without a thorough knowledge of the hedging skills of any manager appointed. Risk can be increased dramatically if you go blind into such a venture, and I know of several cases where such a strategy has backfired badly on pension funds." Hugh Wheelan"