Starting anything with a clean slate has an obvious appeal. On this principle, many pension funds choose to do away with the risk of currency fluctuations within their overall portfolio before attempting, separately, to add value through active currency management.
Dutch pension fund PGGM says that from an asset liability management perspective, it hedges its exposure to foreign exchange risk 100%.
The currency beta, says Marc Nuijten, head of treasury and overlay management within PGGM, is internally managed.
“The purpose of the 100% forex hedge policy is completely to reduce the long-term risk of our strategic asset mix,” he says. But having dealt with this exposure, the fund then also takes active currency positions to add value, and these active - or alpha - positions in currency are run both internally and externally.
“With active currency positions we try to achieve alpha…from the currency markets with a much shorter time perspective,” says Nuijten.
PGGM uses three external managers running global tactical asset allocation mandates, who include active currency positions in their portfolios. The fund is satisfied with the external currency management. “Both internal and external currency positions are managed very efficiently,” says Nuijten.
What advice would PGGM give to other pension funds looking to set up currency management, or appoint external managers?
“Try to combine different investment styles - from different managers - applied to currency markets to get risk diversification,” says Nuijten. “Get your objectives clear before you start and monitor/manage these mandates in line with the defined objectives.
“Investment guidelines and restrictions should incorporate reduction of possible ‘fat tail’ risk.” Another piece of advice is, he says, to be careful judging mandates based on historical simulations. “Real positions taken and real performance have much more information value.”
The pension fund of Norwegian company Statoil, however, uses currency management primarily as a means of complying with government requirement on foreign exchange exposure.
“We need currency management to ensure that we are within the limits of currency exposure set out in Norwegian law,” says Solveig Åsland, general manager of Statoils Pensjonskasse.
“We are using a currency overlay structure, meaning the currency exposure is managed on basis of the complete financial portfolio.” So it is not up to the fund managers to handle their currency exposure, the currency management is performed externally.
But the pension fund does take some advantage of the opportunity to add alpha through currency management. “The purpose is primarily to reduce currency risk, but there is a rather small element of taking active currency risk to add value,” says Åsland.

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