Many pension fund executives remain stumped about which, if any, currency protection programs to adopt - despite talk of a coming dollar rebound.
To increase diversification and, hopefully, returns, many plans have been raising their allocations to international investing. Their timing would prove inopportune if the dollar were to rise because advances in the dollar harm returns of foreign holdings of U.S. investors.
To add to the confusion, it's unclear when the slumping dollar may actually rebound. Now, at least some experts expect further declines in the U.S. currency.
For these and other reasons, many pension funds don't know what to do about the dollar.
"But experience has taught them if they do something now, they are apt to do the wrong thing," said Stephen Nesbitt, senior vice president of Wilshire Associates, Santa Monica, Calif. He said he isn't aware of any Wilshire clients making currency-related moves now.
Jim Waterman, senior vice president of InterSec Research Corp., Stamford, Conn., believes "there is no consensus, no so-called right answer" about what to do about the dollar. What plans choose to do "depends on their objectives, risk tolerance and their own situation. .*.*. And there are different views depending on a fund's time horizon."
He pointed out "it may well be that any recovery in the dollar may be cyclical" vs. longer-term in duration.
For most funds, the popular solution has been to leave currency hedging issues up to the international money managers. Other options include: ordaining that a certain percentage, or all, of the foreign holdings should be hedged at all times, an approach that is losing appeal; hiring a separate currency overlay manager; and changing the performance benchmark in some way, say to global investments from strictly non-U.S., to influence the investing process.
In the future, some consultants think currency overlay management will gain favor, especially with larger funds.
But so far, interest has been relatively modest. According to InterSec, as of year-end 1994, only about 10% of the $240 billion non-U.S. equities investments of U.S. tax-exempt institutions was covered by an external currency overlay program.
In this year's first quarter, the Tracker service of Eager & Associates, Louisville, Ky., recorded no hirings of currency overlay managers.
However, the Los Angeles City Employees' Retirement System is searching for its first currency managers. In addition, sources said the Minnesota State Board of Investment, St. Paul, is among a handful of funds gathering information about currency overlay. But according to the MSBI's executive director Howard Bicker, the Minnesota fund is "just exploring the area and is not doing a search. We have not reached any conclusions" about currency management.
Lawrence Davanzo, managing director of Asset Strategy Consulting, Los Angeles, believes "within the next year or two, 15 to 20 clients will establish a currency policy. For most of them, the answer will be currency overlay management."
But Sue Rutherford, an associate with Ennis, Knupp & Associates in Chicago, points out currency overlay adds to the complexity of international programs. "And at this point, (the marketplace) has not seen a large number of currency management firms with successful long-term track records. The area is still relatively new."
She suggested pension executives look to their current international asset managers. "Be sure these managers have some currency outlook incorporated into their strategy. (Since) quite a few don't have that expertise, select those that do. Or, if looking at multiple managers, don't choose a whole group that lacks expertise in currencies," she recommended.
With all of these conflicting views and options, it's not surprising pension funds aren't gravitating toward one solution.
Jennifer Netterville, investment officer of the $5.8 billion Louisiana Teachers' Retirement System, Baton Rouge, said "we strictly leave hedging to the managers and we have no plans to change that. That's what we hire the managers for, because we don't have expertise in the field" of currency management.
And Jay Fewel, senior equities investment officer of the approximately $18 billion Oregon Public Employes' Retirement System, Salem, said the fund hasn't yet taken any action on the dollar. "I don't see (the Oregon Investment Council) doing a great deal about the dollar until it actually begins to strengthen and erode investment returns." In the meantime the fund, with about $3 billion in non-U.S. stocks, does allow its international managers to hedge currencies "opportunistically," said Mr. Fewel.
AMR Investment Services Inc., Dallas-Fort Worth Airport, Texas, inaugurated its currency overlay program March 1, said William F. Quinn, president of AMR Investment, which manages American Airlines' pension fund. Currency overlay initially will cover about 25% of the pension fund's international investments of about $800 million.
If the overlay program works, "we'll probably expand it to 50%, maybe eventually 100% of international assets," said Mr. Quinn. "If it doesn't, we'll probably wind it down. But we'll give the program a fair amount of evaluation time - about three to five years."
AMR "concluded that currency has a large impact on an annual basis on our international returns," said Mr. Quinn. "But few of our international managers hedge currencies, even though they are allowed to do so, because they are taking longer term, four- to five-year views" on the underlying assets.
"We studied this, and we believe there are people who are better at currency hedging and swapping between currencies, and who can add about 200 basis points per year to the international portfolio."
The $4.5 billion Los Angeles city fund expects to finish searching for currency overlay managers in about two months, said Oscar Peters, general manager.
International equities managers, which run about 20% of the fund's assets, were chosen "not on the basis of their currency management but because of their expertise in international equities," he said.
