The Need for Better Currency Management

"Almost all [international managers having EAFE mandates from US pension funds] have negative value added in the currency management function," according to a recent report by Intersec Research Corp.] Over the 8-year period ending December 31, 1995, this group of managers, on average, added more than 2% per annum to the returns of the EAFE index through active management despite having squandered more than 1% per year in currency losses. They could have outperformed EAFE by more than 3% per year, in other words, if they had focused exclusively on stock selection and market allocation.
The evidence thus suggests that most money managers (in the US, anyway) are either poor currency forecasters or have not been successful in integrating their forecasts into their portfolios. This chapter will address both these issues, focusing first on a practical, easy-to-implement method for forecasting currency exchange rates, and then will provide some suggestions for using these forecasts in conjunction with the management of portfolios containing foreign securities.