Active currency management is providing alpha, according to a new study by Russell/Mellon CAPS.
The study showed that 87% of currency overlay accounts generated positive excess returns over the past five years. The percentage was even higher in US$ accounts where 93% of accounts produced positive returns.
The Russell/Mellon CAPS study is an update of a study carried out in 2000 by Frank Russell Company. It is based on data collected from 29 currency overlay manager and 551 accounts between 1988 and 2003.
In this period, 68% of accounts – some of which are no longer in existence – produced excess returns. The average excess return was 0.88 for separate accounts and 1.15 for composites. The average tracking error was 2.18 for separate accounts and 2.49 for composites.
Throughout the period, the information ratio (IR) has been positive. For separate accounts the IR was 0.27 over the whole period, 0.47 over three years and 0.18 over five years. For composite accounts the figures were 0.45, 0.56 and 0.16.