Consultants from Frank Russell Co., Watson Wyatt Investment Consulting and Evaluation Associates are looking at currency managers' returns on individual overlay accounts in order to better evaluate currency managers.
While consultants routinely speak to managers about performance, the emphasis on separate accounts and their levels of hedging makes this round of interviews different.
Consultants are asking for the returns of managers' individual accounts, instead of a composite.
The dollar has been hit hard recently on currency markets. On Aug. 31, it briefly fell below 110 yen, a seven-month low. And since July it has slipped 4.2% against the euro.
The goal of Russell's team is to write a report this fall telling their clients what currency strategy can get the best results.
The consulting giant is building a research database, which is different from simply reporting a standard performance universe, said Brian Meath, a senior research analyst for Russell in Tacoma, Wash. Heather Myers, head of fixed-income research for Russell in London, also has been making the rounds of currency managers this summer.
Russell is taking a hard look at the returns of the gamut of currency overlay managers, which is fewer than 20 firms, Mr. Meath said. The firms to which Russell has spoken include A.G. Bissett & Co. Inc., Rowayton, Conn., and PanAgora Asset Management, Boston.
The Russell analysts did not meet with hedge funds, he said.
Currency management has been a part of a number of U.S. pension funds' investment programs during this decade. But last year's report by Brian Strange, now a managing director with Key Asset Management, Cleveland, which concluded currency overlay managers could add 1.9 percentage points to money managers' international investments, has spurred the consultants' interest, sources said.
The job of evaluating separate currency overlay accounts is considerable. Consultants are finding the sampling size for most mandates goes back no more than five years, which is one factor making it difficult to draw conclusions. "This is a real small period of time," said Brian Hersey, investment director with Watson Wyatt in Atlanta. A team from Watson Wyatt is working with Mr. Strange and also will write a report on currency management this fall.
Another difficulty is tracking how hedged each mandate is, consultants said. Active currency managers can run portfolios ranging from unhedged to hedged to neutral, with a variety of combinations. The consultants are planning to make comparisons of these specific hedging levels.
Russell is doing the research to look for "a number of different things," Mr. Heath said. "Brian (Strange) published a total figure of 190 basis points. We're hoping to slice and dice the data in a lot of different ways. For our own information, we hope to have conclusions of performance based on base currency, hedge ratios and other restrictions placed on accounts.
"We're not just saying that there is alpha out there, and that's the end of story. We need arguments other than performance to justify it."
Some U.S. pension funds have made moves to currency management or are considering changes. The Middlesex County Retirement Board, East Cambridge, Mass., recently hired two currency managers, A.G. Bissett and Cambridge Financial Management, Cambridge, Mass., to run overlays on portfolios of about $35 million each.
The move was made for diversification in the wake of a recent asset allocation study, said Nancy O'Neil, investment coordinator for the $540 million fund.
Cambridge Financial will do currency overlay for three of the fund's developed market managers. A.G. Bissett also will do currency overlay for three managers, both in developed and emerging markets, said Gus Aristizabal, chief operating officer of Wainwright Investment Counsel, the fund's consultant.
The Mississippi Public Employees' Retirement System, Jackson, has started the process of reviewing its international equity program. Currency management could become an issue when the fund raises its international equity allocation next year. The $15.4 billion fund has a target allocation of 20% to international equities, but is at 13%.
"Currency is not of great concern for us now," said Lorrie Tingle, deputy director of investments for the fund. But, as the fund moves closer to its 20% allocation to international equities, it will "have to make a conscious decision to do it or not."
"Currency will be a topic we will be discussing" after a formal review of the international program is completed in December, she said.
Russell is looking at monthly performance data for each account with a currency overlay manager, he said. Watson Wyatt and Russell each are looking at close to 250 separate mandates with about $50 billion in assets.
That $50 billion is for externally managed accounts, or accounts run by managers that do not run the portfolios' underlying equities. "We haven't concluded what currency managers can add yet," Mr. Heath said. "We're still crunching numbers. But we've found so far . . . that the average is positive. That's unique -- if you think of other asset classes."
