The pension fund of airport operator BAA, with GBP1.4 billion (USD2.57 billion) in assets under management, is considering managing currency exposure on its equity portfolio for the first time. Some 70% of the fund's assets are invested in equity, of which around one third is in foreign currencies, mostly euros and U.S. dollars, said Stuart Condie, BAA's chief economist and a director of the pension fund in London.
The fund's next step will be to discuss fx hedging with Mercer Investment Consulting, its consultant. "Mercer...flagged [fx exposure] as an issue, but we have not yet talked in detail," said Condie. "We usually talk to our consultants first and then approach one or two market players for further discussion[s]." He declined to give details of the type of instruments the fund is considering. "It's very early days," he added. The trustees discuss potential areas for new investment at the beginning of each year, noted Condie, but this is the first time it has decided to look at hedging equity assets as a result of this annual review.
Pension funds have been diversifying into foreign investments over the last five years, so currency hedging is going to become more of a priority, explained Gareth Derbyshire, executive director in the European pension group at Morgan Stanley in London. Likely strategies for the fund could include employing a dedicated currency overlay manager, or giving its equity managers responsibility for managing the risk on a certain proportion of foreign currency investments, he noted.
It could not be determined by press time whether the fund's bond portfolio is carrying foreign currency risk.
