ROUNDTABLE
Should investors be more concerned about the return attribution process to understand more clearly about how much of a currency return is alpha and how much is beta?
KS: $EVROXWHO\ ,Q 5LFKDUG /HYLFK DQG Momtchil Pojarliev analysed the performance of some 17 different currency managers and found that, on average, the alpha was close to zero (although there were some individual managers who did well). If I am paying a currency manager a high performance- related fee, I want to be absolutely sure that the return that is being delivered is alpha and not beta. Performance attribution is essential.
DM: It is important to understand where the returns come from - if the manager is just producing returns from beta, then investors should not have to pay alpha-based fees.
When people talk about currency beta, they are usually referring to persistent sources of return that have become commoditised; effects like carry (exploiting interest rate differentials), trending and value. While all these can be shown to have worked well over the long term, they are prone to prolonged periods when they can be loss-making. A manager ZLWK VNLOO VKRXOG EH DEOH WR KDUQHVV WKHVH LQÁXHQFHV and others to generate more robust returns. If investors can understand how managers generate returns, they will know what to expect from different market conditions and be better able to assess which managers really do have skill.
JB: It is useful to understand some of the drivers of the performance and more importantly it is useful to be aware of the risk management aspect of the process.
In what ways might the currency policy chosen by a particular investor impact on their choice of currency management practitioner?
“If investors can understand how
managers generate returns, they will
KS: I think the key policy decisions by the investor of (a) passive or active, and (b) quantitative or fundamental, will inevitably lead them to consider different practitioners. There is no difference in this respect to the traditional asset classes where practitioners have different expertise in different areas. It would be wrong to lump all currency managers into the same pot.
know what to expect from different market conditions and be
better able to assess which managers
really do have skill.”
DM: It depends what you mean by currency policy. If this UHODWHV WR KRZ FXUUHQF\ ÀWV LQWR WKH LQYHVWRU·V overall strategy and whether the currency manager is expected to implement a currency hedge as well, then clearly the manager chosen has to be able to meet these demands. If the currency manager doesn’t have to hedge the assets or is part of a multi-manager program, then the way is open to consider a wider range of managers, including small niche players.
Investor preferences and the time they have available will also affect how much detail they want to get into. Some will want to know all about the different active currency management approaches and be directly involved in the selection of managers. They will want to consider how different styles will sit alongside their existing managers, and will have strong views on what styles they favour, systematic or judgemental, fundamental or technical, or a blend of different approaches. Others will be happy to GHOHJDWH WKH GHFLVLRQ WR VSHFLDOLVWV 0RVW ZLOO ÀQG LW useful to take expert advice, even if they retain the ultimate decision making power.
JB: The investor’s choice of currency policy may impact their choice of currency manager depending on their objective -
DIANE MILLER
Autumn 2011 | Currency Investor 61
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