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Investment comment
Mark Farrington
Head of currency management

Principal Global Investors

,Author.
The veil of secrecy surrounding
private equity investment could
be lifted following government
rulings on public sector pension disclosures.
Lawyers predicted the recent
judgments by the information
commissioner,
Richard
Thomas, forcing local authorities to reveal private equity
investment details could lead to
a shift in thinking behind confidentiality arrangements and
force the market to improve
transparency.

Currency overlay is
central to this cycle

caption goes in here

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The veil of secrecy surrounding
private equity investment could
be lifted following government
rulings on public sector pension disclosures.
Lawyers predicted the recent
judgments by the information
commissioner,
Richard
Thomas, forcing local authorities to reveal private equity
investment details could lead to
a shift in thinking behind confidentiality arrangements and
force the market to improve
transparency. HW

From a financial market perspective, this decade has been notable

on many accounts, not least of which has been the prolonged
period of low financial market volatility and outperformance of
emerging markets.
Typically, a period of low volatility and the commensurate outperformance of less liquid risk assets such as emerging market equities last only one to two years, and are then quickly followed by a
cyclical correction. However, with this decades bull market we
experienced a significantly longer period of low financial market
volatility, (coupled with an unusual pessimism towards the US and
Japans economic prospect) resulting in portfolio outflow into
emerging markets and general international equities being larger
than at any time in history.
For US and Japan investors, the aggressive allocation to international equities represented the largest reduction in home bias of
any growth cycle. European and other developed markets also
recorded one of their largest cycle outflows. As a result, we can
expect significant currency market moves for which pension funds
may not be appropriately prepared.
In the case of US investors, one can easily see how the US dollar
moves in fairly smooth six to seven-year trends. Part of the trend is
usually structural, but eventually it is cyclical factors that combine
to reverse the trend direction. For a pension fund with increasingly
higher exposure to international markets, having an effective
currency overlay programme in place is critical in order to lock in
the significant gains accrued during these long risk asset expansions and structural currency trends.
While cyclical trends in sterling, euro and other European currencies are not quite as clean and elongated as the US dollar, their
currency moves are still very significant and will greatly impact
international fund performance. Establishing a proactive and
strategic currency overlay programme can assist pension funds
in capturing these major currency market turning points. This
year will be an important year to review and ensure currency
overlay programmes are in place, as the US dollar looks to have
completed another seven-year structural trend bottom and should
be reversing course by next year.

29 September 2008 Pensions Week 7