| UK lagging behind Europe in currency overlay investment |
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| 02/05/2004 | |||||||||||||||||||||
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Currency overlay has taken more time to pick up in the UK than in the US or continental Europe, where it became a common portfolio line in the 1980s. Even though more British investors have now jumped into the currency asset class in the last few years, market data show that most of them still do not seem to believe that a currency overlay within their portfolio is a must. According ot JPMorgan Fleming, only 9% of UK institutional investors have a currency overlay within their asset allocation. The current European average is 23%, while countries such as Switzerland or France have an incidence of institutional investment in currency overlay of respectively 50% and 40%. Incidence of Currency Overlay Strategies
For Paul Skinner, Head of Fixed Income Business Development at Gartmore, the timidity of Britishy investors toward currency overlay was largely due to UK institutional investors' past understanding of the sterling as a weak currency, a misconception according to him. "Many UK investors had the misconception that sterling was a weak currency and therefore any foreign currency exposure was a good thing. However, due to the higher interest rates in the UK investors have been well compensated for being in sterling", Paul Skinner says. Consequently, British institutional investors have traditionnally preferred to rely on in-house currency risk control strategies. Too bad for the investors: "Amateur currency management has not been successful", he says. Attraction With currency movements frequently slashing the performance of an investment portfolio, UK investors do not lack any good reasons to adopt this strategy. "Eventually and hopefully, increasing risk management considerations and risk-return enhancements strategies over shorter time frame periods have made the appeal of currency overlay more obvious", says Renaud Mattis, Senior Portfolio Manager at Overlay Asset Management. Investors' specific demands have also led to the formation of a solid support base, hence stimulating investment in this asset class. "The demand for extra return that is not correlated to equities and bonds, combined with a general acceptance of the skill of professional currency investors has finally led to the Consultant fraternity in the UK to voice their approval of currency management", says Gartmore's Paul Skinner. "[UK] investors have increased their sophistication in searching out the most efficient ways of applying a risk budget to produce the best return possible. This has led to a seach for different and proven asset classes such as currency", concludes Paul Skinner. This e-mail address is being protected from spam bots, you need JavaScript enabled to view it |
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