GLOBAL - Deutsche Bank says currencies can be the saviour for unfunded pension plans.
In new research titled "Currencies: Pensions Saviour?", the bank suggests foreign exchange is the answer to future pension fund problems caused by underfunded pension plans.
According to Bilal Hafeez, global head of FX strategy and author of the report, foreign exchange "should be viewed as an asset class similar to bonds and equities" as its long-term systematic returns are "comparable, if not better" and it has greater liquidity than both.
Based on evaluations of the FX market over the last 20 years Deutsche suggests that for global portfolios to benefit the most from foreign exchange, allocations to FX should be comparable to those of bonds and equities, i.e. 20%-30%.
The research backs a new trend that has evolved among UK pension funds to invest money in so-called alternative asset classes including foreign exchange.
One of the latest funds to join this new development was the Essex County Council Pension Fund. Earlier this month it tendered up to £1bn (€1.46bn) in active currency overlay.
Earlier the West Midlands Metropolitan Authorities Pension Fund tendered both a currency alpha mandate and an active specialist currency overlay mandate.
"Most people expect foreign exchange to be a zero-sum game", Bilal Hafeez told IPE. "However, with simple strategies like carry trade (buying currencies with higher interest rates and selling those with lower interest
rates) you can make money in the long run."
He assesses the risk of FX investments as "somewhere between bonds and equities".
The research paper shows that the correlation of FX market returns is very low compared to those of equity and bond markets. Consequently, the addition of FX to a portfolio of bonds and equities could help to reduce the volatility of returns as well as the duration and magnitude of phases of
With an estimated turnover of $1.9trn per day the foreign exchange market provides ample capacity for investment.
According to Euromoney's last global foreign exchange survey published in May, Deutsche Bank accounts for an almost 20% share of the global FX market.