CASE STUDY

Currency Overlay

Belgian Pension Plan | November 2016

Engagement at a glance

A Belgian pension plan was seeking an active currency overlay, aiming to passively hedge a diversified portfolio whilst adding c.1% p.a. in excess return. There was also a secondary objective of minimising cash flow rolls.

 

CLIENT-SPECIFIC CONCERNS

The investor was seeking a manager that was complementary to their existing overlay manager and there was strong preference for the active component to follow a systematic approach. On a more practical note, the manager would ideally have knowledge of the local regulatory regime and experience in dealing with the client’s custodian. Reporting was also key.




  • When we first started doing active currency overlays in ‘96 there were two types of manager: bottom-up and top-down. The picture today is very different.

Outcome

  • The client was keen to leverage bfinance’ prior search experience in this area, and ultimately elected to invite a pre-defined shortlist of managers to participate rather than undertake to invite the entire universe. Although atypical for a search, the client was comfortable with a pre-defined shortlist which also enabled the project to be expedited. This list included specialist FX managers, bank proposals and offers from large, diversified asset managers. The client had no preference on type.

  • Although the client preferred systematic strategies, our suggested universe also included managers with a fundamental aspect to their investment process. The key here was identifying a manager that was complementary to the existing manager, whilst also being standalone suitable and strong.

  • Throughout the search process is became clear that implementation strength was just as important, if not more so, than the approach to the active overlay strategy. Another key point was not just to focus on explicit management fee charges but to look at total implementation costs. To this extent we made extensive use of independent TCA analysis to investigate implicit trading costs amongst the participants.

  • After detailed qualitative comparison and due diligence, narrowing the group to nine and then four, the client ultimately appointed two managers – one a fully systematic, specialist dynamic hedging managers and the other a multi-strategy (fundamental and systematic) manager.

Our specialist says

  • Currency overlay is becoming increasingly important as global economies diverge in monetary policy. The key here was to identify a manager that was not only able to deliver excess returns, but also act as a safe pair of hands in what is a core component of the overall portfolio. It was as much about implementational strength as quality of investment process.

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