SBB, the CHF16.7bn (€15bn) pension fund for Switzerland’s federal railways, is leaving some of its exposure to the Japanese yen and the US dollar unhedged.

Speaking at the CFA Society Switzerland’s recent pensions conference in Zurich, Roger Kunz, head of investment research at the SBB, said: “Up to a certain minimum exposure, both currencies reduce risk in our portfolio.”

After hedging, currency exposure in the portfolio is 85.2% Swiss franc, 6.9% US dollar, 2.6% euro, 1.1% yen and 2.8% emerging market currencies, plus some small exposure to minor currencies.

But Kunz stressed that, beyond a certain threshold, the diversification and risk-mitigating effects are wiped out by volatility risks – “in our case, this is just over 2% for yen”.

Similarly, exposure to euros or US dollars is capped at 2% and 6%, respectively, with 100 basis points of leeway either way.

“FX has to be seen as a separate asset class, and the portfolio has to be actively positioned to optimise the risk/return profile,” Kunz said.

He emphasised that SBB, which won the IPE Country Award for Switzerland last year, was changing its foreign-currency exposure to minimise risk, “not for currency speculation”.

Kunz added that there was no risk premium in currency overlays or investment strategies, and that, over the long term, it was “a zero-sum game return-wise”.

To find the optimal positioning for the SBB portfolio, he said he and his team took into account not only the asset side but also the liabilities as a short position.

In addition to the slight exposure to yen, euros and the US dollar, Kunz has also left emerging market currencies fully unhedged, although “in recent years, this has proven to be not such a good idea”.

“However,” he added, “the general assumption remains that these countries and their currencies have room to appreciate in real terms over the long run regarding productivity and international competitiveness.”

Australian and Canadian dollars, as well as UK sterling, are fully hedged due to their high correlation and volatility.

Speaking at the conference, Kunz also lamented the lack of academic research on currency risk in institutional portfolios.

“With equities, because they have a higher risk profile anyway, FX risk only makes up a small portion, but with some bonds, the FX risk can make up to half of the total risk exposure,” he said.

“So the correlation between currencies and bonds is much higher than with equities.”