Issue: February/March 2006


Michael Streatfield, strategist at Investec Asset Management Michael Streatfield, strategist at Investec Asset Management, offers practical guidelines to trustees on how currency management should best be handled.

With South Africa on the brink of further exchange control relaxation, it’s vital for trustees to update themselves not only on international markets but also on the dimension of currencies in which their retirement fund’s money is invested. New approaches are emerging on how to manage currency exposure across a whole fund.


When investing internationally, funds are exposed to the performance of the assets in which they are invested and to changes in currency values relative to the rand. For example, in 2005 the MSCI World Index went up in US dollar terms by 11,4% but in rand terms by a much better 17,4%.

As South Africans, we tend to look at everything fixed in terms of rand. But with international investments, currencies should be viewed as a shifting web of relationships that can be used to provide another source of returns. The global currency market is the largest market in the world; some $2 trillion is traded daily.

Despite its high liquidity, this market has inefficiencies because certain participants such as central banks, tourists and exporters might enter transactions without regard to prevailing investment conditions.


Despite its high liquidity, this market has inefficiencies because certain participants such as central banks, tourists and exporters might enter transactions without regard to prevailing investment conditions.

It’s the extent to which changes in the value of currencies affect performance of international investments. (See figure 1). A retirement fund’s international investments tend to be in pooled funds, priced in US dollars. However, this does not mean that the fund is exposed to the dollar alone. The dollar is simply the reference point for reporting. In practice, the fund might be investing in assets around the globe and would be exposed to the currency where these assets are bought; for example, in yen if it’s invested in a Tokyo-listed Japanese bank.

Our exporters are exposed to currency risk. When mining and manufacturing, their costs are based in rand. When selling abroad, they earn other currencies such as euros. So if the rand weakens against the euro, their profits will fare better – and vice versa – when they finally bring the money home. A way for them to manage this risk is to put a “hedge” in place – using financial instruments like forwards to peg the currency rate and create certainty for the exporter.

Unfortunately, by law, South African retirement funds cannot hedge the value of their international investments back into rand. Funds must look for other ways to control risk but still benefit from offshore diversification.

Figure 1

Figure 2


To begin, ensure that the international investments are actually in a spread of currencies to create more diversification.

Traditionally, funds have chosen a passive approach by simply relying on diversification within the international investments. For example, by choosing global mandates they hope that the international asset manager will invest in a spread of currencies as they go about their task. (See figure 2).

In this manner, currency diversification is generally achieved. A problem is that the fund becomes exposed to countries where stocks are being bought and not necessarily where good currency value is found. For example, the US equity market dominates the world index.


Of late, international currency markets have changed substantially. Look at the moves in the euro and US dollar, with dollar weakness having persisted for more than three years. Internationally, retirement funds are beginning to adopt a more active approach so that they can benefit from currency movement. This is a growing trend. In 2004, global investment consultant Mercers noted that active currency overlay searches went up from 2% to 10% of all searches making up 26% of total money placed for their clients that year.

It works by funds allocating a portion of their international assets to currency overlay managers. They manage a wide basket of currencies aiming to generate additional returns across the client’s entire book of international assets. This appeals to international clients because the retirement fund’s existing asset strategy remains unchanged. Also, because this layer of returns tends to be uncorrelated with other market performances, it can enhance diversification.

Currency as an additional source of return should be exploited, not only accepted, by South African retirement funds as they look offshore.