GLOBAL – Bill Muysken, global head of research at Mercer Investment Consulting, has provided an insight into the way the consulting firm goes about analysing currency managers in a presentation at the latest IPe-Symposium.
He noted that there has been a lot of client interest in currency overlay recently, with 44 currency overlay selections accounting for $15.1bn of assets over the past three years.
But he said the “universe” of potential managers is so large – there are 117 currency managers on Mercer’s database - that it’s not cost effective to research all of them in depth.
So it does initial screening to identify a target list. It uses client and colleague feedback, market intelligence from “wherever we can get it” along with an assessment of the firm’s credibility. He said Mercer tries not to “go overboard” on RFPs and questionnaires. “Finally, we look at performance.”
One of the problems is the difficulty of analysing currency performance data. Mercer asks for returns to be geometrically and not arithmetically calculated to avoid compounding small errors.
He said Mercer focuses on the information ratio – the consistency with which a manager beats a benchmark - instead of excess returns.
Mercer uses a four-factor framework for evaluating managers. This includes factors such as: idea generation, the ability to translate that into portfolio weightings, implementation and business management.
He revealed that four of the managers Mercer gave low ratings to in 2005 closed down by the end of that year.
“We try not to be too threatening,” he said, of the manager interview process. “For them its really an important thing for their business – they’re often quite nervous.”
If performance drops off you might have to look at “subtle things” such as the growth in assets under management or staff changes.
Elsewhere, Mercer said in a release that 60% of survey respondents of companies in the FTSE 350 have made ‘special’ pension contributions in the last year.
And it found that the use of derivatives to hedge liabilities had shown “limited growth so far”.