Clients select SSgA's currency overlay management for
four key reasons. Our process is effective in both trending and regime shifting
currency environments. The strategy is transparent and understandable. The
bringing together of technical and fundamental components in our process
via a rules-based system creates disciplined and risk controlled portfolio
construction. The process is easy to adapt to any risk budget and can be
tuned to any base currency or benchmark.
SSgA Currency Selection is an active investment process that manages the
currency exposure created by owning international assets. Exposure to foreign
currencies entails consideration of a host of issues and associated risks.
SSgA's Currency Selection strategy addresses these issues directly. The
investment management process adjusts a fund's currency exposure, creating
several benefits.
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Reduced volatility of currency
returns from the underlying assets. |
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Downside losses protected from
foreign currency depreciation. |
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Upside gains from foreign currency
appreciation. |
Currency Management Philosophy
At the heart of SSgA's Currency Management strategies lies the belief
that currencies as an asset class behave very differently compared
to bonds and equities. Indeed the make up of foreign-exchange market
participants is strikingly different; many currency market participants
are not seeking profit from currency but are rather consummating some
other underlying transaction or attempting to eliminate risk by hedging.
True profit maximisers are few in these markets, which leads to many
market inefficiencies. An active manager can capitalize on the inefficiencies
inherent in these markets and add value to an international portfolio
over time. Indeed, we believe that this means that the management
of currency risk can be most efficiently achieved with an active approach
rather than a dynamic hedging or option-based approach.
In analyzing the forces driving currency markets, SSgA research has
identified two broad trends. The first is that a thorough analysis
of the characteristics of currency price movements reveals distinct
price patterns in foreign exchange rates, price patterns that are
repetitive and predictable. The second is a fundamental, macroeconomic
analysis which examines the historic relationship between economic
data and currency prices to forecast future price movements. Our experience
and research has led us to believe that both of these approaches are
valuable in evaluating currency markets. Therefore we have designed
our models to incorporate both technical and fundamental components.
Currency Overlay Management Process
We incorporate two models in evaluating currency pairs. With our trend
model, the currency strategy utilizes a set of quantitative and fundamental
trend indicators to identify the direction of currency movement. With
the second, our fair value model, the process determines, through
the use of fundamental inputs, whether a currency is mis-valued relative
to its long-term equilibrium. It is the rules-based system that brings
these major elements together and sets portfolio positioning. Which
currencies to over- or underweight and the size of those positions
is driven by the strength of pressures building or of trends identified.
By employing a set of structured decision rules rather than optimization
techniques, we avoid the potential of underestimating risk and at
the same time capture important information from our fundamental and
technical models. As warranted, active positions are reduced to limit
portfolio risk as increases in volatility occur, and the portfolio
is repositioned with a reversal in the trend model. This raises the
potential for higher returns in both trending periods and when large
deviations from fair value have occurred. Thus, the portfolio can
benefit whether currency markets are driven by trending or mean reverting
price movements.
The currency markets component of any international portfolio should
be considered autonomously from the portfolio's underlying equities
and bonds. This de-coupling of currency from other assets puts currency
assessment and management in the hands of currency specialists. In
addition it fosters a currency management strategy whose performance
and contribution are clear and simple to measure.
SSgA seeks to maximize currency opportunities by employing both active
and passive strategies. For active strategies, we endeavour to add value over any benchmark irrespective of the base currency of the portfolio. We can also manage portfolios against specific risk targets.
A staff of approximately 20 professionals manages our currency strategies across
six offices worldwide. Of this group, the majority are portfolio managers. We also work closely with SSgA's Advanced Research Center
to enhance models and develop sophisticated currency applications.
Portfolio managers work as a collaborative team, calling on their
global expertise to develop and enhance techniques that drive our
investment process. Ultimately, our professionals and the processes
they use serve our clients best by their continual adherence to the
primary currency maxim we have used from the beginning: to add value
while reducing risk whenever possible.
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