Global Pensions Currency Management Forum: Beta does not make an asset class

Most speakers at the Global Pensions’ Currency Management Forum in Toronto on March 11 agreed that there was beta in the currency markets, but questions remained about whether or not that was enough to declare currency an asset class. 

In a panel debate about trends in the currency markets, RBC Capital Markets senior fixed income and currency strategist David Watt told attendees: “I’m still concerned about whether currency can serve as beta.”

“We don’t know enough about it to say it can form an asset class,” he said. 

There are four generally accepted drivers in the currency markets – carry, trend, volatility and value – and some market participants consider these to double as betas. 

Watt said the currency market is young compared to the fixed income and equities markets, and the benchmarks themselves only date back “a few years”. 

“You can’t say, ‘There’re returns to be made, therefore it’s an asset class’,” said Watt.

Conversations surrounding the question of currency as an asset class are a relatively new phenomenon, said Investec Asset Management head of currency management Thanos Papasavvas. 

“This is the beginning of the transparency of currencies,” said Papasavvas. “(Of currencies) being broken down into transparent, repeatable sources of returns.” 

He believed this will cause a shift in the way currency managers are evaluated. 

“Going forward... consultants and pension funds will be saying, ‘What would our returns have been if I had invested in passive carry’,” said Papasavvas. “The industry will be marking us against stylistic betas.” 

Parker Global Strategies managing director Jon Stein said most people lean towards carry as an industry-wide beta, but the style is not suited to all managers. The firm tends to use a mix of carry, trend, volatility and value as benchmarks.

Mercer principal Michael Lewis said the consulting firm generally uses cash as a benchmark to evaluate its currency managers against. “We use these betas as a comparison, not evaluation,” he said. 

Lewis said Mercer’s pension fund clients do ask about whether currency can be incorporated as a stand-alone asset class, but the answer doesn’t really matter when the investor’s main concern is to add value. 

“Whether you call it a fish or a paddle, it’s either going to work or it won’t,” he said. 

Separately, panellists said they’ve seen an increased interest in the use of active currency management. 

Lewis said Mercer has seen a move towards more absolute return type strategies. 

Parker’s Stein predicted the trend would continue in the future. “Active currency management is going to be embraced more.” 

Stein’s comment came in response to a question about what trends will become mainstream in the coming years. 

He added support to the asset class debate when he said: “Currency will be increasingly looked at as a separate asset class with inherent returns.”

Going forward

State Street Associates vice president and head of currency research Jordan Alexiev said he expects to see an “increased focus on transparency going forward and (investors) trying to understand what’s driving the returns behind different strategies”. 

Papasavvas said he expected volatility to remain elevated in the next three to five years “so diversification, or diversity, will continue to generate better returns with more volatile markets”. 

Lewis said he expects exposure to emerging markets to “pick up steam”. 

Investors’ increasing comfort with emerging markets could have an impact on the US dollar’s status as a reserve currency, added Watt. 

Emerging markets are starting to shed their image as high-risk regions to invest in, he said. 

“We talk about Greece, but you don’t have to go far to find... the US having 50 Greeces,” said Watt. “In general we could see the US dollar lose its status as the prime trading currency, if not the prime reserve currency.”