Deutsche Bank has released new research titled “Currencies: Pensions Saviour?” which suggests that for global portfolios to benefit the most from foreign exchange, allocations to FX should be in the order of 20%-30%. In that way, the quality of returns can be significantly enhanced, not least by considerably reducing the duration and magnitude of phases of returns underperformance.
Foreign exchange has often been viewed as an alternative asset class, rather than as a comparable asset class to bonds and equities, due in part to the absence of a widely followed benchmark and ignorance of the return characteristics of FX.
Bilal Hafeez, Global Head of FX Strategy, who devised the research commented, “We feel that foreign exchange should be viewed as an asset class similar to bonds and equities. It has exhibited long-term systematic returns or “beta” which are comparable, if not better, than both bonds and equities since 1980. It also has greater liquidity than both.
“We believe the prevalence of underfunded pension plans increases the chances of pension crises over the next few decades. Numerous approaches have been proposed to address the issue, including better matching of assets to liabilities by using fixed-income products, the use of derivatives and of alternative asset classes.”
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