Gaining Currency?

Currency is being billed as a source of higher returns for corporate pension plans. But sponsors remain skeptical.

Want to be like Warren Buffett? Don’t pitch softball in Omaha; bet against the dollar in the global currency markets. The chairman of Berkshire Hathaway, who says he is hard pressed to find something better to do with the money, has almost half of Berkshire’s cash hoard of $43 billion in 12 other currencies. Of Berkshire’s $3.5 billion in investment gains last year, more than half came from foreign-exchange contracts.

True, currency investing doesn’t appeal to some finance executives. Says Mark Buthman, CFO of paper-and hygiene-products maker Kimberly-Clark: “We view [currencies] more as a source of volatility and risk than as an opportunity to create value.” When it comes to earning more than Treasury bill rates on the company’s $594 million in cash, he says he would much rather buy back Kimberly-Clark shares.

Yet there may be at least one place for currencies within today’s corporations—their pension plans. With the value of the dollar falling, investment banks and pension consultants are now pitching currency both as a new source of so-called alpha returns (something beyond the “beta,” or average, returns available from the public financial markets) and as a hedge against financial market risk. They insist that plan sponsors are overlooking a way that could help solve the funding problems many sponsors face.

Take General Motors. It began hedging the currency risk of its sizable portfolio of international equities 15 years ago, but has since begun to seek alpha as well from the activity. Initially, says David Holstein, managing director of global equities for the company’s asset-management division, the company sought to hedge up to 100 percent of the portfolio’s currency risk. Now, the plan takes a trading position in a number of currencies. Its three largest positions are in the dollar (short), the yen (long), and the pound sterling (long). And only 50 percent of the currency risk posed by its $15 billion in international equities (out of total plan assets of roughly $90 billion) is hedged today.

Comments Holstein: “Over the long term, we realized that one doesn’t get paid for currency hedging.” And given the cost involved even in that, he adds, “it behooves you to get some alpha—active management can add value.” Of course, that assumes that companies can find currency managers who usually make the right calls, offsetting the stiff fees managers charge.

An Inefficient Market

The case for pursuing alpha returns rests on the currency market’s inefficiencies, which reflect both its vast liquidity and the varying agendas of its participants. The average daily trading volume of the global cash market is $1.9 trillion, dwarfing the world’s most liquid equity and bond markets (see chart, page 88). And unlike participants in the equity and bond markets, in which most everyone seeks a profit, many currency-market players behave with other goals in mind. Central bankers try to nudge exchange rates in one direction or another for macroeconomic or geopolitical reasons, corporate managers use hedging strategies to protect transaction revenues generated abroad, and tourists exchange currency simply for purposes of local spending.


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