Metzler Capital Markets, in cooperation with Metzler Asset Management (Japan), won the first currency hedging mandate for a major Japanese pension fund in March. This multi-billion mandate was awarded to four banks, three of which are global financial services providers. Metzler Capital Markets was selected to manage the active currency hedging of pension assets in both a European growth strategy and a US bond strategy. "This is the first mandate of its kind in Japan and we are very pleased to have been selected. Due to the similarities of the Japanese and German pension fund markets, we sought access to the institutional investors early on. Thanks to our perseverance and the extensive network of our asset management colleagues in Japan, this has now paid off," says Mario Mattera, Member of the Executive Board at Metzler Bank.
Pension funds in Japan have the same hunger for returns as their counterparts in Germany. "Japan’s persistent low-interest-rate environment, stagnant economic growth and shrinking domestic market due to demographic change have led local institutional investors in search of returns to invest more abroad. Accordingly, foreign currency exposure has increased significantly," says Hiroki Wiesheu, President and CEO of Metzler Asset Management (Japan). "We also expect an increasing need for hedging of foreign currency risk and thus consider this mandate in the pension fund market to be a milestone."
Currency overlay is a hedging strategy for foreign currency risks. The aim is to limit foreign exchange losses while simultaneously keeping the opportunities open for participation in positive exchange rate developments. For foreign investments, local currency is converted into the currency of the country where funds are invested, i.e. a currency conversion takes place. When the investment is later exchanged back to the original currency, another conversion takes place at the prevailing exchange rate. The difference between the two exchange rates can result in a gain or loss; thus investments can make gains or losses based simply on exchange rate conversion. Currency overlay serves to reduce the impact of extreme currency movements on portfolio returns.