While fund managers believe that country allocation and currency management are likely to be less important in Euroland, one remaining concern is the impact of discrepancies between differently-denominated funds in the same sector.
The precise impact of the broadening 'domestic' market on diversification and currency risks will only be-come clear once sufficient historical data has been accumulated. Funds which specialised in money market and fixed income investments in, or hedged into, participant currencies now have drastically altered objectives and are being converged.
The euro project has been accompanied by moves towards harmonisation of valuation methods, market customs and tax. But, at least as far as valuations are concerned, discrepancies are likely to persist for some time.
Swiss Life's marketing manager David Holloway says, Currency risk is the biggest concern we have, where the stated performance of our funds is compared to funds in the same sector which are not euro-denominated. Japan posed a similar problem for us because our funds were denominated in yen while others were in dollars. The weakness of the yen had a detrimental affect on the performance figures. The danger is that this may happen for euro funds, depending on the strength of the euro. Our concern is that statistics have got to be based on pure performance. How will the euro affect historical performance analysis? The Dutch Pension Funds Association suggests that the introduction of the euro "may indeed constitute a structural interruption of the historical series that many Dutch pension funds use for their ALM studies. Important aspects here are the change in the average yields, the change in patterns of correlation between inflation and the re-turns on cash, bonds, equities and real estate, and the impact of this on the re-lation between assets and liabilities."
Fund statistics firm S&P's Micropal is working on a new study of euro fund performance. It has already produced some guidance notes (see box). In performance calculation, there will be three basic situations: funds launched after January 1 1999, de-nominated in euro; existing funds which convert to euro denomination; and other funds that will remain de-nominated in other currencies.
If the performance period on a 'converted' fund is after January 1, it will be calculated ineuro. If the analysis per-iod straddles or is prior to the conversion date, performances in euros can't be published - they can only be published in their original currencies. In the case of analysing fund performance in euros, or in the pre-conversion currency denomination, S&P's Micropal anticipates no problems in applying the relevant fixed euro original de-nomination currency conversion rate.
The conversion rates will be applied retrospectively to the funds' pre-conversion historic data when calculating performance return numbers.
Therefore returns for the period pre-conversion will be aligned with post conversion returns but in exactly the same ratio as in the pre-conversion currency denomination.
S&P's Micropal recommend this approach because the actual past performance records of the fund are exactly that, actual, and should not be distorted by any application of historic currency effects. No proxy euro rates should be used.
Funds not denominated in euros will have no conversion rates available prior to January 1. Returns for these funds will be in the base currency of each fund, and be converted into euros after the conversion date. If you request performances of these funds in euros you will only be able to get performance of these funds after January 1. Up to 2001, euro participants will also have their national currency quoted but the two will be irrevocably tied. Many 'euro' fund promoters are giving clients the option to retain the original currency reference of their investments during the transition period up to 2001. Their valuations will show the assets in two currencies."