Smaller U.K. funds flocking to currency overlay specialists

LONDON — Currency overlay manager hirings by small and midsize U.K. pension plans have surged during the past six months. And currency specialists say assets managed overall for U.K. clients nearly doubled in the last year.

Demand has been so strong that money managers — including Barclays Global Investors, London, and Record Currency Management Ltd., Windsor — recently set up pooled investment funds to handle what has traditionally been an area of segregated mandates.

Goldman Sachs Asset Management, London, is rumored to be following suit, but firm officials would not comment.

Pooled funds for actively managed currency-based strategies are relatively new and make it easier for smaller pension plans to access this market, said John Gillies, director of consulting at Russell Investment Group, London.

Data to be published next month by Mercer Investment Consulting show that 15 of the 16 searches for currency overlay mandates done by the firm worldwide in the last six months were for U.K. clients. Assets placed in these searches totaled $4.4 billion, of which $4 billion was for U.K. clients. Mercer officials wouldn't identify any of the clients.

This compares with four out of eight similar searches the firm did for U.K. clients during the whole of last year for total underlying assets of $2.7 billion.

While similar statistics could not be obtained from other firms, consultants did acknowledge the use of currency hedging and absolute return strategies on currency by U.K. plans has increased in the last year.

"This is the year when (currency overlay) got to the top of everyone's agenda and word was converted to action," said Bill Muysken, global head of manager research at Mercer.

Currency specialists have seen assets soar in the last year.

At the end of June, BGI's U.K. assets under management in both passive and active currency strategies more than doubled to $25 billion from $13 billion a year earlier. The U.K. passive currency hedging business grew to $16 billion from $7 billion and the active currency strategies saw assets under management rise to $9 billion from $6 billion all over the same period.

BGI's global assets in both passive currency hedging and active currency management increased to $50 billion from $26 billion over the same period.

BGI set up its pooled funds last August. It now has 12 clients accounting for £92 million ($170 million) in the currency hedge fund and seven in the two active currency funds accounting for £54 million.

At Record Currency Management, assets under management soared 84% for the year ended June 30, to $16.6 billion, according to Neil Record, chairman and chief executive officer.

"We have recently had weeks of participating in eight to nine searches at the same time," he added.

Record just launched its pooled fund in early July.

To date, currency overlay strategies have most commonly been used by large pension plans. But as Mercer and other consultants spread the word, executives at smaller plans have recognized both the risk management and alpha-generating benefits of these strategies.

Clients with assets of £100 million or less would typically use pooled funds, said Mr. Record. He acknowledged, however, a pooled fund would not offer a tailored hedge of a plan's total foreign exchange exposure.

Similar to the BGI product, Record's pooled fund bases its hedging strategy on market-cap weightings for individual currencies based on the FTSE World, ex-U.K., index.

Most clients using Record's or BGI's pooled funds were willing to accept a hedge of 75% of their foreign currency exposure, according to the firms.

Trustees of the £100 million Honda Motor Europe Ltd. Pension Scheme, Slough, last year appointed its core equity manager, BGI, to hedge 75% of the currency risk in its £43 million international equity portfolio using the pooled fund, said trustee David King. Trustees also decided to invest in the firm's pooled active alpha-generating strategy; Mr. King didn't give the amount.

The move coincided with a decision by trustees to increase the plan's international equity exposure and followed detailed discussions with the plan's consultant, Mercer, he added.

Richard Meese, BGI's managing director-currency strategies, said pooled funds make it easier for smaller pension plans to get access to currency overlay. Currently the firm has £92 million in its pooled currency hedging fund.

Most U.K. pension plans have now accepted the argument for hedging their international currency exposure. "The additional argument that needs to be made is that currency is also a good place to look for alpha," he said.