The Rijwik-based Dutch Metalworkers Pension Fund (MSN), which holds assets of Dfl20bn ($10bn) for around 300,000 members, currently operates an open currency strategy towards all its foreign investment, but as Hans Redemaker, head of financial investments at MSN, explains, the advent of the euro is obliging the fund to reconsider its options.
At present MSN follows self imposed investment restrictions of a minimum of 60% asset allocation in Dutch guilders and German deutschmarks, or what it terms the 'low risk' currencies, whilst holding a 40% maximum in foreign holdings. Our open currency strategy comes partly from the opportunities available in the US two to three years ago, where value could openly be added through being overweight on the dollar, and a hedging policy did not seem appropriate," Rademaker says.
He concedes though, that considering the scientific evidence, the argument is now strong on efficiency criteria for a currency overlay strategy in the long term.
Since 1994 MSN has increased its foreign investment exposure from 20% to 35%, but Rademaker says that by definition this figure will drop after January 1 1999 as Italian lire and French franc exposure become part of the single currency.
However, this drop in foreign exposure will still necessitate increased investment outside of Europe to ensure portfolio diversification, with Rademaker stating the emphasis will undoubtedly be on emerging markets.
" This shift into Asia and South America will certainly bring with it greater risks than at present, due to the different behaviour of these markets than Europe. Therefore, we will almost certainly have to consider a hedging strategy to offset volatility."
Rademaker says though that where possible MSN will also look for enhanced returns through hedging in such volatile markets.
" Although I can't say for sure, the likelihood is we will follow a 50% benchmark currency overlay programme, which is recommended by most experts and seems like a reasonable level to start at."
He adds though that this will more likely than not remain an in-house fund strategy, continuing MSN's current specialist mandate structure, which does not permit individual managers any currency decisions other than settling purchase or sales in the currency of the country invested in.
The only hedging techniques presently operated at MSN are by two fixed-income managers, who construct their portfolios through a quantative strategy, separating currency and interest rate decisions. Although Rademaker says performance of these European bond portfolios has been muted over the last two years.
Post euro, MSN's major foreign exposures will be towards the dollar and the yen, but as of yet no hedging strategy is envisaged against these currencies.
According to Rademaker, this does not mean there will not be one though: "We are talking to currency overlay managers at the moment and will continue to do so on into 1999 to keep our options open. I believe it is quite possible that by the middle of next year we will have some overlay strategy in place."
A breakdown of MSN's holdings, showing underweighting of the Japanese yen and Hong Kong dollar against overweighting on the deutschemark and US dollar, as well as a short holding against stocks, whilst being long on real-estate and fixed income, shows a very active currency policy.
Any decision to pursue an even more active policy after the euro, Rademaker says, will depend on the market in question and its volatility. "We are constantly seeking to optimise our returns, and if this necessitates a more long term currency overlay strategy than our current open policy, then we will certainly explore this option." Hugh Wheelan"