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Foreign Exchange

UK council shortlists four currency managers for hedging mandate

Norfolk County Council Pension Fund has shortlisted four currency managers for a dynamic hedging mandate of its £850 million equity portfolio tendered in October, a council spokesperson has confirmed.

Berenberg Bank, Pareto Partners, Record Currency Management and State Street Global Advisors were shortlisted for the four-year mandate, which will be awarded to just two of those firms, for managing the pension fund’s currency exposure on its equity portfolio. Alex Younger, the fund’s accountant, said the official mandate would likely be finalized in June. The contracts will be open-ended, subject to a regular performance review during the four-year period. The council interviewed six currency managers, in accordance with European Union rules on public procurement.

The fund’s equity portfolio has an existing 60% hedge in place, managed by its custodian, and the aim of the new strategy, according to Younger, is to reduce volatility of investment returns and capture positive exchange-rate movements with better performance than the existing arrangement.

A combination of systematic quantitative strategies as well as discretionary approaches to dynamic currency hedging will be used, added Younger.

The council has also said the new arrangement will have a particular emphasis on reducing drawdown risk in the event of outflows from the fund associated with the hedge.

“We’re prepared to forgo upside in terms of inflow, but what is very difficult for us operationally, as it is for many other funds, is the management of outflows when the movement is positive on the asset side, but not in terms of the hedge,” says Younger.

The transition from the existing hedging arrangement will take place this summer.

Norfolk County Council Pension Fund has assets worth £2.1 billion and invests 34.5% in international equity, 24% in UK equity, 19.5% in fixed income, 15% in property and 7% in private equity.

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