Pension plans to be wary of currency exposure, says JPMAM

J.P. Morgan Asset Management says pension plans should be wary of their currency exposure, particularly when hedging to Sterling.

Recent currency analysis from J.P. Morgan Asset Management shows the Euro and Sterling amongst the least favoured currencies in their developed market investment process. The reasons for this negative view are fundamental drivers such as weak investor flows, unattractive interest rates and poor yield momentum.

From a longer-term perspective, J.P. Morgan Asset Management believes there will continue to be sovereign risk concerns in Europe which will weigh on these currencies, however, given the extent of the relative price adjustment over recent months (Euro) and the last few years (Sterling), the Group believes the valuation of these currencies now look more interesting.

Certainly, FX volatility has risen dramatically over the last few months and whilst J.P. Morgan Asset Management expects a moderation of the current elevated levels, it believes this will be an ongoing medium-term theme.

Speaking about the impact this will have on pension plans, Peter Ball, Head of UK Institutional Business at J.P. Morgan Asset Management said, "Many UK pension plans hedge at least 50% of their investment returns back to Sterling. Whilst many plans implemented hedging for risk control purposes, the current weakness of the pound will be having a significant impact on their portfolios."

He went on to say, "Currency exposure should not be a reactive strategy in times of market turbulence, but with emerging market and other developed country currencies fairing much better than the Euro or Sterling, pension plans should look to take on a more dynamic approach to their currency exposure."