The Russell/Mellon survey of actively managed currency accounts* continues to grow in its coverage. Last year’s results indicate that managers on average can add value in this type of mandate across a broad spectrum of investor’s currencies.
The survey of active currency overlay managers is conducted on a quarterly basis and the results now extend back over 15 years. As at December 2003, 563 separately managed accounts run by 29 asset management firms, covering $135bn (e109bn) in assets, were represented in the universe. To illustrate just how much this area has grown over the last three years, the comparative numbers at the end of 2000 were 241 accounts representing $69bn. This growth in assets managed by specialist currency overlay managers shows that an increasing number of pension funds are taking the currency management away from equity and bond managers. 

Accounts are only included in the survey where at least three major currencies are managed within the account to add value. The overall universe also captures the results from a range of accounts with different base currencies, different degrees of hedging in the benchmark and different management styles. For this reason a number of sub-universes are also calculated to focus on a particular emphasis. The composition of account type is illustrated below.
Clearly the majority of accounts are managed to a USD base, but the survey covers a broad range of the major currencies which we can use to identify whether there are any market biases that influence the results from the investor’s perspective.
As at December 2003, the majority of institutional investors who hired currency overlay specialists experienced positive results. A total of 69% of the accounts in the universe added value over the life of the account. USD based investors had a higher success ratio than other investors with 77% success ratio.
Breaking this down into the different base currencies, the spread of success ratios is interesting from 55% for GBP based managers to 90% for Australian dollar based managers. In the case of the latter, the higher number of unhedged accounts than fully hedged can explain the higher success ratio of these managers. These accounts do not have a very long history and so would have benefited from the recent strengthening of the AUD.
To avoid bias by managers with a large number of accounts and to control survivorship bias it is useful to look at manager composites, where we combine results for all accounts run by that manager. On this basis 97% of the managers in universe added value over the period.
The USD based investors have experienced high success ratios for every hedge group, between 84% for the 50% hedged group and 91% for the 100% hedged group.
The USD based manager composites with at least five years worth of history and still in existence at the end of December 2003 had a 100% success ratio for every hedge group.
While high success ratios are encouraging, it is necessary to examine the magnitude and volatility of the excess returns. The average excess return for the 563 accounts in the universe was 0.97% per annum with a tracking error of 2.16%. When we look at the manager composites the average excess return was 1.31% per annum with a tracking error of 2.47%.
Once again, looking at the various different base currencies, the USD based managers outperformed the average of all managers with an average excess return of 1.32% and lower volatility, with a tracking error of 2.42%. All three USD hedge ratio groups performed well and, given
the history that we have and the number of USD based accounts,
this has clearly benefited clients who have had different approaches to hedging.
The GBP based manager composites stand out for underperforming the average of all composites. The average excess return was 0.22% per annum. It is difficult to draw any conclusions from this, as the UK market is not as developed as the US market for this type of mandate. There are only 27 GBP based accounts in the universe. Of these, three accounts have three years of history and only one has five years history.
The quartile chart illustrates results for the composites to the end of 2003 showing positive results on average for all the combined periods shown including calendar year 2003. In addition over 75% of the managers added value in each period.
Combined with previous survey results these observations continue to demonstrate that currency managers can add value in a variety of markets and conditions.
Alan Wilcock, research and development director – Russell/Mellon Europe
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