(December 12, 2011) – Ian Toner and Cynthia Steer—current and former Russell Investment employees whose work on FX has garnered much attention—believe that the recently published Survey of FX Investment Risk shows American investors are behind the curve compared to their international peers.
“My perspective on the result of this first survey is that it is very consistent in terms of both actions by plans sponsors and policy issues that either have or have not been taken and probably need to be taken in the next several years,” Steer noted earlier this week. “I believe FX will be one of the most important issues that North American plan sponsor deal with in the next couple of years. How they deal with that could determine some of their longer-term returns, due to intermingling of FX with monetary policy and outlooks on inflation.”
Ian Toner—Director, Research & Communications, Russell Implementation Services—echoed Steer’s comments, but also saw a ray of hope in the survey’s results. “First of all, one of the things that is common across geographies is the issue of whether ‘currency comes out in the wash.’ One of the few points of quasi-unanimity was that both [US and non-US investors] seemed to agree—over 50% in each case—that currency was not a zero-sum game. A majority of investors believed this – so that’s a useful framework for dealing with this, and one of the few points of agreement.”
However, some issues need to be addressed, according to Toner. “The combination of the investment policy statement (IPS) and the regular reporting results—this survey brings out in really clear relief the fact that there has been a difference in historical best practices. Talking about it in the IPS, talking about it with investment committees, regularly reporting on it—this seems to be a better form of best practices that the rest of the world outside the US seems to have adopted. It seems sensible for US investors to move towards this as well.”
Steer agreed: “Americans are not the leaders on this issue,” she said. “Europeans, Australians, possibly even Canadians have all dealt with this issue better, they’ve made it a managed risk, and they’ve gotten on with life.” This is a result, Steer believes, of a “paradigm shift, and the consequences of that. Whereas in the States we are still debating whether it’s an insignificant or insignificant risk, that’s not true elsewhere. We’re probably missing the point here.”
She continued: “This is a 20-year issue—that we do not understand where our exposures come from or the duration of our exposures. This is reinforced by the survey.”
Once investors overcome this issue, Toner believes, they will be thankful. “Once you’ve got that in place, then this drops down the list of priorities, because you’ve managed and understood the issue,” he said. “When you are an owner of capital, rather than asking ‘Should I hedge,’ it should rather be about ‘What exposure do I want and how do I manage that?’ It should be described and measured like they any other exposure in the portfolio – this is what we refer to as Conscious Currency.”
Click here for a full review of the survey’s results.