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Impact Investing

IPE special report May 2018

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Huge potential seen in FX for pension funds

GLOBAL – There is “huge growth potential” in the global foreign exchange market, says Putnam Investments.

Michael Sager, senior vice president at the Boston-based firm’s currency investment unit, cited the “untapped nature of the pension fund industry” in the FX market.

Even in the US there was a “very small percentage” of funds with currency mandates, and the UK was also “largely untapped”. He told IPE: “I think there’s a long way to go.”

Sager’s comments follow a report last week from Greenwich Associates which said currency is increasingly being seen as a separate asset class for “real money” investors. And Mercer Investment Consulting has reported a surge in interest in currency overlay (see separate story).

Sager – a former economist at the Bank of England - saw “many, many fold growth” in the area as large as well as small and mid-size schemes entered the FX market to boost returns and increase diversification.

Putnam, which currently has around $16.5bn of currency assets under management, is hosting roundtables on FX this week in the UK and Ireland for potential pension fund clients and consultants. Speakers include Professor Mark Taylor of Warwick University, one of the leading academics in the field, Sager said.

Putnam has 12 people dedicated to currency, including head trader Jason Fromer, who worker in a similar capacity for George Soros, Sager said.

One of the benefits of currency mandates, Sager said, is that schemes do not have to fund them with cash upfront. “You don’t have to divest assets to pay for this thing,” he told IPE in an interview. “It’s all done with forwards.”

There was now more emphasis on consistency of return than five to 10 years ago. There was more of a realisation that there was a lot of inefficiency in the FX market, which is estimated to turn over $1.5trn a day. Sager said it was easy to confuse liquidity with efficiency – and that most players in the market are not actively seeking to make a profit on their trades.

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