INVESTOR PERSPECTIVES


The reality is that most managers only calculate the returQ RQ WKHLU HTXLW\ SRUWIROLR DJDLQVW WKHLU benchmark index. They do not take account of the currency effect on the SHUIRUPDQFH RI WKHLU HTXLWLHV ´6LQFH 2002, the MSCI EAFE index in U.S. dollars is up 48%, 43% of which has come from currency appreciation versus the dollar,” according to Record.


But while these performance tools GULOO HYHU PRUH GHHSO\ LQWR WKH HTXLW\ manager’s backyard, the fact that managers are only now coming around to bog-standard TCA means these calculations will rarely be considered.


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DWWULEXWLRQ LQ D JOREDO FRQWH[W DV FRPLQJ IURP WZR PDLQ


VRXUFHV 7KH ÀUVW LV WKH SULFH DSSUHFLDWLRQ RI WKH DVVHW LQ WKH ORFDO FXUUHQF\ RI GHQRPLQDWLRQ WKH RWKHU FRPHV IURP


“The reality is that the cross product LV SUREDEO\ WKH PRVW GLIÀFXOW WR understand from a performance attribution perspective. Fortunately, this term is W\SLFDOO\ TXLWH VPDOO IRU PRVW SRUWIROLRV ,W·V SUREDEO\ not the kind of thing you want to spend a lot of time explaining to a pension board,” acknowledges Menchero.


FRQYHUWLQJ ORFDO DVVHW YDOXHV EDFN WR WKH EDVH FXUUHQF\ RI WKH LQYHVWRU µ


JOSE MENCHERO


%XW RWKHU IDFWRUV OLNH VOLSSDJH DQG OLTXLGLW\ DUH becoming ever more common elements in products like Morgan Stanley’s FIX which provides algorithmic H[HFXWLRQ EDVHG RQ KLVWRULFDO OLTXLGLW\ SURÀOHV


“We’ve discovered that synchronicity of trading is LPSRUWDQW ² H J LI WKHUH LV D VLJQLÀFDQW ODJ EHWZHHQ WKH H[HFXWLRQ RI WKH XQGHUO\LQJ HTXLW\ WUDGHV DQG resulting FX trades, this can result in unnecessary increases in tracking error ,” describes Peter Eggleston.


Timing analysis The timing issue of trading introduces risk. “Traditionally currency execution in London happens around 4 p.m. but the securities trade could have been done in the morning and can expose a portfolio to considerable price drift and slippage,” explains Eggleston. “We analysed the effects of delayed H[HFXWLRQ LQ DQ LQWHUQDWLRQDO HTXLW\ SRUWIROLR taking into account all currencies in the MSCI World index, and found that the potential risk of delaying execution up to 36 hours could be as high as 500 basis points on an annualised basis.”


Timing analysis goes further. “We’ve found that if


you’re in London and want to buy Mexican pesos then it is generally better to wait until New York RSHQV 6LPLODUO\ WKH OLTXLGLW\ RI HDVWHUQ (XURSHDQ currencies falls off a cliff when London closes,” Eggleston informs.


7KHVH LVVXHV RI OLTXLGLW\ KDYLQJ WKH FXUUHQF\ availability when you want it, can be compounded by WKH LPSDFW RI \RXU GHDO RQ WKH PDUNHW WKH HIÀFLHQF\ of the transaction and the increased or decreased risk premia.


But the new interest in performance metrics on both transaction costs or in innate fees, the spread, is beginning to gain some credence in the investment community. On the sell-side, the custodian banks are ORRNLQJ WR ZLQ EDFN VRPH FUHGLELOLW\ RWKHUV XVH LW DV D way to demonstrate their market-making capabilities.


On the buy-side there’s a growing realisation that PDQDJHUV KDYH IDOOHQ GRZQ RQ WKHLU ÀGXFLDU\ responsibilities. They also need to improve investment margins, even by basis points, and even the threat of TCA tends to improve the forex price performance.


´0\ FOLHQWV KDYH JHQHUDOO\ VHHQ D VLJQLÀFDQW GHFUHDVH in transaction costs after introducing TCA,” reveals McGeehan.


Autumn 2011 | Currency Investor 33


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