Statistics published by Mellon Analytical Solutions (MAS) today show that over the longer term, currency overlay managers added value. Over the five years to 31 December 2006, these managers achieved a median excess return of 0.51% p.a., while over 10 years the outperformance was 0.44% p.a.
According to the results of MAS’s latest analysis, the majority of overlay managers also added value over the final quarter of 2006, with a median excess return of 0.38%. However, these managers were less successful over the medium term, with excess median returns over one and three years to 31 December 2006 of -0.07% and -0.18% p.a. respectively.
Currency overlay performance has come under the spotlight in recent years as many pension funds have increased their exposure to overseas investments in order to diversify their equity risk. Over the last 10 years, the average UK pension fund weighting in overseas equities rose from 21% at the end of December 1996 to 29% at the end of December 2006.
With this increased overseas investment however, comes increased currency risk. If that currency risk is not managed tactically, then there is an element of the fund carrying risk without reward. Consequently currency overlay has been brought increasingly under the spotlight.
Daniel Hall, Mellon Analytical Solutions’ Publications and Statistics Manager, said: “The strength of sterling in 2006 highlighted the impact that fluctuations in the currency markets can have on the value of UK pension fund investments overseas. The currency overlay managers in our analysis have shown great consistency over rolling five-year periods, achieving positive median excess returns to each quarter-end since Q2 2002.”
Each quarter, MAS publishes the results of its Currency Overlay Manager Profile Analysis. This survey examines the overall excess returns achieved by active currency overlay managers against benchmark, across different styles, hedge ratios and base currencies. The results of this survey have now been published for the quarter ending 31 December 2006.
The MAS Currency Overlay Manager Profile Analysis is a Mellon Analytical Solutions service. The universe includes accounts from 19 separate asset managers with a total asset value in excess of $103 billion.
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