Currency Overlay Performance
Introduction
A.G. Bisset & Company has been verified firm-wide by Ashland Partners & Company LLP beginning January 1, 1990 and through June 30, 2008.
Pension fund consultants like Russell/Mellon, Mercer, and Watson Wyatt have found that the average currency overlay manager has generated excess returns relative to client-selected benchmarks that have averaged around 1% per year in the past decade.
See Putting the Case Beyond Doubt by Kurtay Ogunc and Brian Hersey at Watson Wyatt Investment Consulting.
Currency overlay managers are normally compared by the excess returns they achieve relative to a benchmark because overlay returns are not directly comparable unless underlying currency exposures, benchmarks, and investment guidelines are largely similar.
The excess return measurement method has serious limitations as well because it ignores the cash-flows overlay programs generate over time.
A method to measure an overlay’s added value relative to its cash-flows was published by A.G. Bisset & Company in Cashflow Measure of Overlays in Investment & Pensions Europe, September 2004.
Ashland Partners & Company LLP has conducted a performance examination on the composites shown below through June 30, 2008.
List of Composites
Euro Base Composite
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Less than ten currency overlay management firms have managed currency exposures against the euro (and its predecessor currencies) for more than a decade.
Bisset’s Euro Base Composite begins in 1992 and spans fifteen years.
The red line in the graph represents Bisset’s cumulative overlay return, net of fees, compared to the alternative, passive benchmark returns of 0% hedged (the exposure is never hedged) and 100% hedged (the exposure is continuously hedged).
Bisset’s success derives from its strategy to place a hedge as soon as a declining price-trend in a currency has been identified by its currency model and to remove a hedge as soon as a price-decline has ended.
Two to three hedges per currency are normally placed during a year.
Overlay strategies based on dynamic hedging techniques, which increase and reduce hedges gradually as prices rise and fall, normally provide less protection against large currency losses and less upside participation when currencies rise compared to Bisset’s model-driven strategy.
Sterling Base Composite
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Bisset received its first active currency overlay mandate from a UK local authority pension fund in May 2006.
The Sterling Base Composite presents Bisset’s performance of actively managing the typical currency exposure a UK pension funds has in its portfolio.
US Dollar Base Composite
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Bisset’s US Dollar Base Composite begins in 1993 and presents the cumulative overlay return, net of fees, managing EAFE-like currency exposures against the US dollar.
Europe+UK Composite
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Bisset’s Europe+ UK Composite begins in 1993 and is a sub-composite of the US Dollar Base Composite.
It presents Bisset’s cumulative currency overlay return, net of fees, managing European currency exposures against the US dollar.
Japan Composites
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Bisset’s Japan Composite begins in 1994 and is a sub-composite of the US Dollar Base Composite.
It presents Bisset’s cumulative currency overlay return, net of fees, managing the Japanese yen against the US dollar.
Currency Alpha Composite
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Currency Alpha Composite is an unleveraged absolute return product utilizing currency forward contracts.
Performance is independent of any benchmark, permitting investors to compare its returns against those of other asset classes.
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