Performance cools for hot strategy

Currency may be a hot asset class, but performance among some managers is cooling.

While data on individual manager performance is limited, one indicator — the Parker FX Index run by Parker Global Strategies LLC, Stamford, Conn. — shows the total return of 45 currency managers was -0.57% year-to-date through July 31.

That follows a drop of 0.61% in 2004 and gains of 9.5% and 8% in 2003 and 2002, respectively The 45 firms are in the U.S., Canada, U.K., Ireland and Switzerland.

In a separate report, Mercer Investment Consulting said the median currency overlay manager in its 40-manager universe outperformed its respective benchmark by 40 basis points for the year ended June 30. The median manager beat the benchmark by 10 basis points in 2004, 230 basis points in 2003 and 140 basis points in 2002.

"Most managers we track are ahead of their benchmarks over the last three years," said Bill Muysken, global head of research at Mercer Investment Consulting in London. "But about one-third are below, and they are going to need an upturn in performance if they want to keep their clients happy."

Still, during a time of low-expected returns, pension funds are trying to find alpha wherever they can, and many currency strategies fit that bill.

As a result, opportunities for managers continue to grow. For example, Barclays Global Investors, San Francisco, is a finalist in 30 currency searches, and has won 27 global currency mandates this year, said Rick Arney, senior currency strategist.

Among other managers, Bridgewater Associates Inc., Westport, Conn., reports it is a finalist in as many as 10 searches; A.G. Bisset & Co. Inc., Rowayton, Conn., also is in 10 searches; and JPMorgan Asset Management, New York, has made it as a finalist in five searches.

But investors have to do their homework.

Systematic managers, who take a "rule-based or model-driven" approach to currency management, have experienced the worst performance hits, said Virginia Reynolds Parker, founder and chief investment officer of Parker Global Strategies. Currency strategies managed by systematic firms are down 0.8% as of July 31, she said. By contrast, discretionary managers, a group whose decision-making process is more judgmental, is up 0.43% so far this year.

Systematic managers generally are "momentum-based managers," taking a position once a trend has been established, and can get hurt when the trend reverses course, she said.

About 90% of the systematic managers Parker follows take a technical approach to currency management. Most currency investment firms consider themselves to be fundamental, technical, quantitative or somewhere in between.

Regardless of approach, all managers are facing economic volatility that makes it difficult to outperform. That volatility includes fluctuations in U.S. interest rates, as well as ebbs and flows in the U.S. dollar against other currencies, Ms. Parker said.

FX Concepts Inc., New York, uses technical and quantitative forecasting models in its currency overlay and absolute-return strategies, said John Taylor, chief investment officer. The firm's developed markets currency program, which is part of the absolute return strategy, is down 2.99% so far this year, according to the firm's website. It lost 1.59% in 2004, but produced a net return of 22.96% in 2003.

"One of the things about the foreign exchange business is it's not something you can count on making six basis points above the eurodollar rate every month," Mr. Taylor said. "You can make quite a bit of money during a certain period and go through a year and a half of sliding around."

By contrast, FX Concepts' global currency program has generated an estimated net return of 2.22% so far this year, vs. a 1.76% decline in 2004. Its currency overlay strategy is down 0.39% in 2005, compared with a 0.18% gain in 2004. FX managed $12.3 billion in total currency assets as of Sept. 1, up about $1 billion from a year earlier.

Still, any lag in performance is not reflected in assets under management.

"The long-term track records are still good enough for most currency managers to help them win new business," Mr. Muysken said, noting so far this year Mercer has advised on eight currency searches. In 2004, the firm worked on a record 27 searches, while in 2003, there were seven.

Among money managers interviewed by Pensions & Investments, growth in currency assets under management is widespread. Some money managers reported the notional value of the assets (the currency exposure the manager is providing), while others reported dollars invested. Most declined to provide performance figures.

• A.G. Bisset & Co. reported $2.8 billion in total global currency assets as of Aug. 31, up 27% from a year earlier.

• Barclays Global Investors: $45 billion total global currency assets on a notional basis as of Sept. 12, a 41% increase from a year ago.

• Bridgewater Associates: $57 billion in dedicated currency overlay accounts as of Sept. 12, up 35% from a year ago.

• Goldman Sachs Asset Management, New York: $98.9 billion in active global currency assets on an estimated notional basis as of March 31, up 55% from a year ago.

• JPMorgan Asset, New York, $61.7 billion in total global currency assets on a notional basis as of June 30, up 19% in a year.

• Mellon Capital Management Corp., San Francisco: $3.8 billion in currency assets on a notional basis as of Sept. 8, up 245% since the end of 2003. Currency assets have roughly doubled each year for the past two years, including commitments that haven't funded yet, said Charles Jacklin, president.

• Pareto Partners, London: $46 billion in total currency assets as of Aug. 31, up 15% from last year. Michael Shilling, chief executive officer, could not be reached to clarify how the assets are counted.

• Putnam Investments, Boston: $30 billion in global currency assets on a notional basis as of June 30, up 25% from the previous 18 months.

• Record Currency Management Ltd., Windsor, England: $22 billion in total currency assets on a notional basis as of June 30, up more than 25% from last year.

• State Street Global Advisors, Boston, $65 billion in total currency overlay assets as of June 30, including all active and passive accounts. That is up 14% so far this year.

Given the healthy business pipeline, most managers agreed competition is increasing.

"The whole industry has growth and attracted new entrants, mainly in the form of hedge funds and commodity trading advisers that use currency strategies," said Tony Spence, director of currency at State Street Global Advisors.