With no established orthodoxy, consultants considering currency management are for the most part demand-led through their as-set liability studies increasingly raise client awareness of the issue.

Robert Baker, deputy head of in-vestment consulting of William M Mercer in London says that the consultancy is alive to the issue of currency management particularly in the traditionally hard currency areas while the practice is increasingly applicable as in the UK.

Assessing the criteria for manager selection, he says: We are looking for a demonstrable expertise in this area." He divides the market into fundamental and quantitative managers adding that much depends on the client's point of view.

Mike Faulkner, consultant with Towers Perrin, divides currency management into strategic and tactical management. With the former, responsibility lies with trustees and is a long term decision with most funds deciding to stay unhedged while the more short term tactical management is delegated to fund managers.

Baker stresses the importance not just of the type of management but the quality of the investment process influenced by factors such as the back office features and how they deal with futures. "We see it as a specialist role," he adds.

"In many cases we are talking about neutralising currency risk but in some currency overlay agreements we were involved with re-cently, the client was expecting added value."

Andrew Smith, an associate at Bacon & Woodrow, raises the benchmark issue noting that most schemes with overseas investments have an overseas benchmark at the discretion of the fund manager. However, he says: "We are now seeing clients coming through suggesting that there ought to be some element of hedging in the benchmark," adding, "The decision not to hedge is the risky one rather than the decision to hedge."

He personally remains sceptical about active management: "I am not convinced that active management adds a great deal of value. There is a danger that the pension fund is the mugged counter party where the bank wants to do a deal with some more favoured client."

In terms of criteria, he says: "There is great variation between managers so it depends on the particular risk management our client has. It is difficult to give a general rule though to my mind no manager distinguishes themselves."

Assessing the prospects for the widespread adoption of overlay in the UK, Faulkner adds: "I think trus-tees in the UK have a lot on their plate at the moment. Currency management is a little further down the line."

In Germany where investment consulting plays a limited role, most currency investment advice, ac-cording to Towers Perrin in Frankfurt, is either provided by the financial institutions themselves or by the internal consultants of companies such as Siemens that possess sophisticated capabilities.

In the Netherlands, another traditionally hard currency area, Franz Dooren, investment consultant with Aon Consulting, says that most currency management is done internally by pension funds or is seen by smaller funds as part of the remit of an international mandate.

The largest funds, he says, are the most active in the area.

John Lappin"