GLOBAL – Sindo Oliveros, director of investments at the World Bank Pension Plan, has outlined his views on how currency fits in with pension fund investment strategy at the latest online IPe-Symposium.
He noted how cross-border assets can become “quite volatile” due to currency movements.
“In the early days it should not come as a surprise the currency programmes were to do with risk management and were 100% hedged.” The bank has had a currency programme in some form for some 10 years.
Currency hit the headlines in the early 1990s with the ejection of sterling from the European Exchange Rate Mechanism – reputedly making billions for speculator George Soros.
This changed perceptions, Oliveros reckons. “The point really is that investors that had been using currency as a hedging mechanism realised it could be used as a source of alpha. That is how the currency overlay programmes got launched.” But he said it’s a concept with much ambiguity.
“At the one end there’s 100% hedging while at the other it means using currency as a separate asset class.” More recently, the World Bank itself had bee been using it for yield enhancement and risk control.
He described the global FX market where players such as corporates and central banks are not profit maximising – the proportion of ‘speculators’ was put at between 10%-15%.
With the bulk of the market dominated by the non-profit-making entities, there was scope for excess returns.
Like other speakers on the Symposium, Oliveros pointed out that there’s no consensus among practitioners about even whether currency is an asset class at all.
“It’s not an asset class in a traditional sense,” he said. “But this debate has been overtaken by events.” He cited the growth of trading by hedge funds. “It’s presented as a tactical asset class.”
“Clearly currency risk is a consequence of global investing that could be avoided and therefore should be managed,” he noted.
Regarding optimal hedge ratios, Oliveros said they were unstable over time - and that plan sponsors should use more qualitative factors to determine their optimal hedge ratio.
In terms of finding currency managers, he explained that the approach of the World Bank has been to create a universe and organised them by types and styles, the widest possible diversification. “We don’t evaluate the manager on a standalone basis but as a fit in the overall portfolio,” he stressed.
“None of this I would call uber-objective,” he added – pointing out that models tend to embed some sort of bias.”