The effects of currency overlay management run counter to some of the reasons plan sponsors invest internationally, according to a study of currency overlay management.
Instead of going to the expense of hiring a currency overlay manager, a plan sponsor can get the same effects by reducing international exposure in favor of domestic exposure, the study said.
Sponsors may lose sight of the fact that a key benefit of international investment is the lack of correlation with traditional U.S. markets, said Kenneth J. Winston, principal in the New York office of Richards & Tierney, Chicago.
"If you put blinders on" looking at the international portion of a portfolio, and try to reduce the risk of that portfolio, then currency overlay makes sense, he said.
But from a broad portfolio perspective, currency overlay reduces diversification effects of international investments.
"When you hedge away the currency exposure, you make international assets behave more like domestic assets."
Mr. Winston wrote the study with Jeffery V. Bailey, director of employee benefit investments at Dayton Hudson Corp. It was published in the summer issue of The Journal of Portfolio Management.
-Paul G. Barr