Metzler Capital Markets received the award "Currency Manager of the Year 2020" by European Pensions Magazine in December. The currency management team has won the valuable award against very strong competitors for the second time after 2017.
We asked Özgür Atasever, team leader of Metzler Currency Management, how currency overlay mandates performed in the Corona crisis year 2020.
What was the impact of the turbulences on the currency markets at the height of the Corona crisis last year?
One of the most important requirements for a successful currency overlay manager is to ensure a smooth hedging process of currency risks in customer portfolios at all times. At the end of February last year, the sharp fall of equity markets also led to a rapid increase in volatility on the foreign exchange markets. As a result, liquidity in the FX market, which normally has the highest turnover volume of around 5.000 billion US-Dollars daily, dried up temporarily as key market participants withdrew from trading venues and stopped offering market prices. In turn bid-offer spreads temporarily widened to four times the normal spreads. During this period, our large number of international banking partners, which has grown over decades, and our direct access to liquidity on various electronic trading platforms helped us execute our hedging transactions smoothly and efficiently as usual.
Did you notice any special features in your particular product segment Currency Overlay in the crisis year 2020?
Yes, the importance of currency overlay as a sub-area of asset management in general has grown enormously. This is because the need to hedge currency risks was again impressively demonstrated in 2020, as it had been in 2017 and other comparable years. The year 2020 was characterized by a particular strength of the euro. The euro gained over 8% against the US dollar. Against emerging market currencies such as the Brazilian real, Turkish lira and Russian ruble, the appreciation of the Euro climbed temporarily over 30% throughout the year. Hence, unhedged investments in these currencies led to painful losses. Many institutional investors are often not yet hedging globally diversified investments in equities and so-called alternative investments (such as infrastructure, real estate and private equity) against currency risks. Given the low hedging costs which are expected to remain on that level for some time (currently 0.85% p.a. to hedge US Dollar investments ), we recommend to reconsider hedging decisions. These investments should also be hedged against currency fluctuations. Considering the low yield environment in international markets the currency contribution of investments in foreign currencies is simply too large for the overall investment performance of a portfolio.
How do you assess the importance for your specific service “FX Overlay Management”?
Currency management is a very challenging task one should preferably entrust a specialized FX overlay provider with. This not only allows transferring the operational risk for this sub-area to the overlay manager. It also makes it possible to ensure that the right decisions are made immediately in the event of sudden increases in volatility and undesirable price movements, which was the case last spring. Specialized currency managers are also able to improve the efficiency of the entire process and to document detailed and transparently each currency's contribution.
Many institutional investors consider investments in foreign currencies as an important part of their strategic asset allocation. Foreign currencies allow for improved diversification of investments and can increase the achievable return. However, the associated management of these foreign currency exposures is not a simple settlement procedure, but a very important part of the overall value chain and success in portfolio management. As stated above in the ongoing low interest rate environment, this currency contribution has grown disproportionately in recent years. It should therefore be managed decisively and ideally by an external specialist.
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