A striking dichotomy emerges between US and non-US
capital owners in our inaugural survey of FX practices.
Historically, American institutional investors have had the luxury of glossing
over the risk currency fluctuations pose to their portfolios. It shows.
This is the most striking finding in the latest iteration of our Survey of
Asset and Geographical Allocations (SAGA) Series—our inaugural FX
Edition. In it, we asked capital owners from around the world to answer
questions on their FX practices. Did they have international currency
exposure? Did they hedge it? How did they hedge it—and why? The
answers they gave illustrate multiple dichotomies within the institutional
world regarding thoughts and actions relating to this often hidden risk.
While there are significant differences in FX practices among public
pensions, corporate pensions, and endowments/foundations/sovereign
funds—as well as with funds under and over $5 billion in assets—the
most striking dichotomy is that between US and non-US funds. In short,
for a variety of reasons, foreign funds are much more likely to actively
acknowledge FX risk, hedge it, and take the risk seriously.
It starts with the basics: Non-US funds (72%) are much more likely to
hedge their foreign currency exposure than US funds (28%). These
non-US funds are also almost twice as likely to insert explicit language
into their investment policy statements regarding currency exposure-
67% (non-US) to 37% (US). That same margin is seen when asked whether they have discussed currency exposure with their
investment committee in the past three months. The dichotomy extends to internal reporting as well: Seventy-one percent of
non-US funds produce a currency exposure report for their investment committee on a regular basis,
defined as at least annually. Only 29% of American funds do the same.
Interestingly, the lack of FX focus in the US extends to defined contribution (DC) plans, which a number of respondents run
alongside their defined benefit pension plans. Overall, 58% of respondents had, within their job capacity, oversight over a
defined contribution plan; only 18% of respondents considered FX in these plans, while 40% did not. While only 30% of
non-US funds ran DC plans, nearly 90% of these fiduciaries considered FX risk. Conversely, in the US, 68% of respondents
ran DC plans. Only 22% of these respondents considered FX risk.
Before we damn US funds over their lack of risk management, a caveat: Hedging can be costly, and with the dollar as the
world’s reserve currency, it was perhaps less important for US funds—with liabilities in US dollars—to hedge currency exposure.
Also, some US funds commented that their foreign exposure was relatively small, and thus did not warrant any hedging.
However, as portfolios become increasingly diversified geographically, and the US (perhaps) loses its reserve currency
status, these funds will need to be increasingly aware of their foreign currency exposure. Time will tell if, in fact, they are.