CURRENCY MANAGEMENT $ GLIIHUHQW DSSURDFK
Conscious CurrencyTM I believe there is a better way to address this problem. We at Russell call this approach Conscious CurrencyTM
WR SURYLGH WKH FXUUHQF\ VSHFLÀF EHQFKPDUN ULVN return stream. However if they’re being paid active management fees the expectations should be higher, and always compared to the benchmark rather than an absolute return approach.
. Conscious Currency™ asks of investors
one simple question: do they believe that currency market behavior can be described in its own terms? By this I don’t mean can they predict which way particular currency pairs (or even the currency market as a whole) will move. As an industry we’re not generally very good at making those calls for the equity market, let along the currency market. No, all I’m meaning is that investors must decide whether the currency market as a whole (independent of what international assets they might hold) can be described in a benchmark.
Investors who believe that such a description is not possible should recognize the implications of what they’re saying: if you can’t describe a source of risk, you also can’t rationally conclude that the source of risk is anything other than uncompensated. As we’ve seen above, this means that investors of this type should simply eliminate their exposure to currency markets altogether.
Investors who believe that these markets are describable need to select an appropriate benchmark to describe them. Note that here they don’t need to believe that currency “is an asset class.” That’s a theoretical argument of some interest but little practical importance. All that investors need to recognize is that it’s a describable source of investment volatility, to which many rational investors are currently exposed.
Having chosen a benchmark (there are multiple available from a number of providers) investors should then model the world using asset class benchmarks for international assets that are fully hedged, but should include at the same time in their modeling a possible exposure to the currency benchmark that they’ve chosen. This approach separates the decision to take currency risk out on its own, and also allows the international exposures to be described more accurately.
Having decided on their strategic asset allocation, investors can then appoint managers accordingly (whether active or passive) in each desired exposure grouping. Currency exposure decisions should be managed in exactly the same way. Any currency manager appointed should at least be expected
Now, it’s important to note that this approach is only just available to the institutional market. 5HWDLO LQYHVWRUV ZRXOG JHQHUDOO\ ÀQG LW GLIÀFXOW or impossible (and certainly risky) to adopt this approach on their own and are likely best advised simply to begin to prompt their investment advisor to demand product with this idea embedded in it.
Conclusion Why do we believe Conscious CurrencyTM makes sense?
First, it treats currency risk seriously and on its own terms. Rather than assuming that currency exposures “fall out” of other exposures, or that currency managers should be assessed in a vacuum, it recognizes that currency is a stand-alone opportunity set, and that the decision to take on currency risk should be taken rationally and explicitly.
Second, it seems that it would have (at least in back tests) produced good outcomes for investors choosing to follow this approach. There isn’t space in this article to describe all the testing and research we’ve done on this topic, but details can be found in a research piece available on the Russell Investments website: (
http://www.russell.com/institutional/ investment_solutions/
conscious_currency.asp).
Third, Conscious CurrencyTM currency managers.
Finally Conscious CurrencyTM redirects the wayward thinking of the standard approach to currency, which caused decisions to invest in HTXLW\ DQG À[HG LQFRPH WR be distorted by embedded and unthinking exposures to currency risk. Therefore, we believe that Conscious CurrencyTM
brings clarity
and consistency to the long-standing challenge of currency market risk.
helps investors ensure
that when they hire active currency managers they’re not simply paying for expensive beta. Conscious CurrencyTM
provides a framework for evaluating
IAN TONER - director of research and
communications, Russell Implementation Services, Russell Investments.
Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, QRU D VROLFLWDWLRQ RI DQ\ W\SH 7KH JHQHUDO LQIRUPDWLRQ FRQWDLQHG LQ WKLV SXEOLFDWLRQ VKRXOG QRW EH DFWHG XSRQ ZLWKRXW REWDLQLQJ VSHFLÀF OHJDO WD[ DQG LQYHVWPHQW advice from a licensed professional.
Autumn 2011 | Currency Investor 27
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56 |
Page 57 |
Page 58 |
Page 59 |
Page 60 |
Page 61 |
Page 62 |
Page 63 |
Page 64 |
Page 65 |
Page 66 |
Page 67 |
Page 68 |
Page 69 |
Page 70 |
Page 71 |
Page 72 |
Page 73 |
Page 74 |
Page 75 |
Page 76 |
Page 77 |
Page 78 |
Page 79 |
Page 80 |
Page 81 |
Page 82 |
Page 83 |
Page 84 |
Page 85 |
Page 86 |
Page 87 |
Page 88 |
Page 89 |
Page 90 |
Page 91 |
Page 92