FX Experts: Survey Shows “Americans Are Not Leaders on This Issue”

Commenting on aiCIO’s inaugural FX Investment Risk Survey, Russell Investments' Ian Toner and ex-Russell currency guru Cynthia Steer point to deficiencies in American asset owners' FX practices.

(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.”

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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.

NY State Pension Trustee Calls 401(k) Plans 'Woefully Inadequate,' Defends DB

Defined contribution plans should not replace defined benefit plans, asserts Thomas DiNapoli, the New York state comptroller and sole trustee of the $133.8 billion New York State Common Retirement Fund. 

(December 14, 2011) — In a wide-ranging discussion of the New York public pension system, Thomas DiNapoli, the state’s comptroller and sole trustee of the $133.8 billion New York State Common Retirement Fund (CRF), defended defined benefit (DB) plans. 

Defined contribution plans, the comptroller said, are not adequate to replace defined benefit plans. “The reality is that 401(k)s were never intended to take the place of pensions,” DiNapoli said in a speech held on December 12 at the New School’s Schwartz Center for Economic Policy Analysis in New York City.

He continued: “According to Boston College’s Center for Retirement Research, 401(k) plans lost a collective $1 trillion during the Great Recession.”

According to DiNapoli, recent market turbulence is a reminder of the “inherent instability of 401(k)s and how daunting it can be for individuals with 401(k)s to navigate their way to a secure retirement…If that’s not enough of a reason to be wary of moving from pensions to 401(k)s, according to the National Institute on Retirement Security, defined benefit plans cost 46% less than individual 401(k) style savings accounts”

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DiNapoli’s speech comes after he announced in October that CRF allocated $300 million to Artemis Real Estate Partners as its initial investment in a new emerging manager component of the Fund’s real estate portfolio. “I am proud to announce the Fund’s investment with Artemis Real Estate Partners to kick off our real estate asset class emerging managers program,” DiNapoli said in a statement. “With the emerging manager program now in place across our asset classes, the Fund has affirmed its status as an innovator in the field and shown once again its commitment to enhancing diversity and opportunity while improving its bottom line. The Fund has a strong historic track record of developing relationships with successful financial managers of the future.”

In June, DiNapoli proposed legislation to codify his ban on the involvement of placement agents, paid intermediaries and registered lobbyists in investments with CRF.

CRF became the first public pension fund in the nation to ban placement agents when DiNapoli issued his Executive Order in April 2009.

“Since I took office, we’ve worked to implement reforms that will help restore integrity and trust in this office and the pension fund,” DiNapoli said in a release. “Banning placement agents and lobbyists from involvement in investments was a big step. Now it’s time to make that ban a permanent part of New York State law.”

In his speech this week at the New School’s Schwartz Center for Economic Policy Analysis, he reiterated his efforts to address the misdeeds of the previous administration, asserting: 

“When I became Comptroller in 2007, I inherited a mess. My predecessor is currently serving a prison sentence for corruption in connection with mismanagement of the Pension Fund. From my first day in office, I made it my top priority to restore ethics and integrity to the Pension Fund’s management. Over the past few years, we’ve instituted substantive changes that have strengthened the Fund, putting more eyes and more scrutiny on the investment transactions we make.”

As outlined by the comptroller, these reforms include:

1) Banning the involvement of placement agents, paid intermediaries and lobbyists in any investment transaction and putting an end to pay-to-play campaign contributions;

2) Reporting investment performance results quarterly and releasing all Fund transactions to the public every month, and;

3) Creating the positions of Inspector General and Special Counsel for Ethics, and assembling a Pension Integrity Unit to identify and prevent pension errors, fraud and abuse.

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