{"id":21154,"date":"2020-11-25T11:50:12","date_gmt":"2020-11-25T11:50:12","guid":{"rendered":"https:\/\/davies-group.com\/consulting\/blog\/fx-investment-returns-reduced-costs\/"},"modified":"2026-01-23T15:53:43","modified_gmt":"2026-01-23T15:53:43","slug":"fx-investment-returns-reduced-costs","status":"publish","type":"blog","link":"https:\/\/davies-group.com\/consulting\/blog\/fx-investment-returns-reduced-costs\/","title":{"rendered":"Foreign exchange \u2013 how a heightened focus could improve investment returns and reduce costs"},"content":{"rendered":"<p>Are investment firms truly clear about the degree of portfolio drag and magnitude of operating risks and costs incurred by their FX activities? Increased volatility \u2013 as seen earlier this year \u2013 makes this an even more important challenge to resolve.<\/p>\n<p><strong>Why now?<\/strong><\/p>\n<p>Market volatility \u2013 as seen during the first few months of this year \u2013 also generated significant increases in FX trading and hedging activity by investors in support of their investment strategies. We estimate increases of circa 70% in the first quarter and circa 45% over the first half of 2020 based on the FX revenue increases reported by leading custodian banks. This magnifies the importance of ensuring FX activities are optimised to ensure no undue drag on investment returns, nor any unnecessary operating risk and costs incurred.<\/p>\n<p>Moreover, operating model resilience has been tested by the urgent need to shift to hybrid home\/office working models across the asset management industry (and beyond). As the FX landscape evolves and takes shape around the challenges presented by the pandemic, this article explores today\u2019s opportunities for asset managers, asset owners and service providers.<\/p>\n<p><strong>Common Challenges<\/strong><\/p>\n<p>For many investment managers, FX execution \u2013 and particularly currency hedging whether of portfolio investments or fund share classes \u2013 is not their forte and is increasingly seen as an unrewarded risk. We also observe many pension funds \u2013 particularly where they have delegated investment management \u2013 are unaware of the total FX activity undertaken on their portfolios in aggregate and the potential for portfolio drag to be reduced.<\/p>\n<p>Our belief is the management of FX, perceived by many as an ancillary service, should become a priority when seeking to minimise investment drag and realise efficiency gains.<\/p>\n<p><strong>Existing drivers of FX <\/strong><\/p>\n<p>We should not ignore longstanding needs and how they are evolving to create a heightened focus on FX<em>.\u00a0 <\/em><\/p>\n<ul>\n<li>Continuing geographical dispersion \u2013 of investors and investments \u2013 requires\n<ul>\n<li>Increased FX trading volumes across more currencies \u2013 both freely convertible and restricted currencies<\/li>\n<li>More attentiveness to hedging needs \u2013 at both portfolio and share class levels<\/li>\n<\/ul>\n<\/li>\n<li>Developing FX trading technologies, access to increased liquidity, and full transparency strengthen the offerings from specialist providers who focus on the need of the investment community.<\/li>\n<\/ul>\n<p>Poorly managed FX can quickly run up costs \u2013 both for funds and firms; conversely tightly managed FX programmes can reduce FX drag and costs by several basis points.<\/p>\n<p><strong>How can firms address FX challenges \u2013 turning these into opportunities? <\/strong><\/p>\n<p>Wherever you are positioned on the buy-side spectrum \u2013 from asset owner to manager to service provider, there are increasing opportunities to position your organisation to optimise value from FX.\u00a0 For example:<\/p>\n<ul>\n<li>Fund managers can seek to alleviate the complexity, riskiness and operationally heavy demands of their in-house FX operating models by outsourcing hedging activities \u2013 at portfolio, share class, or on a look-through basis \u2013 to specialist providers. The benefits include transferring operational burden and risk, achieving closer returns correlation, and a true and fair allocation of hedging costs.<\/li>\n<li>Similarly, pension funds can address disparate FX trading activity executed via multiple counterparties through their third-party managers by exploring FX netting programmes. These can significantly reduce FX turnover and avoid unnecessary drag on scheme returns.<\/li>\n<\/ul>\n<p>As indicated by the increasing FX revenues earned by the custodian banks, these providers are also investing in their FX capabilities in recognition of the opportunity to capture more and more of investment firms FX turnover. Several have upped their game considerably.<\/p>\n<p>With increased volatility, competitive pressures on maximising fund returns \u2013 and for investment firms to minimise risks and costs, together with improved services from specialist FX providers, now is the time to turn FX challenges into opportunities and reap benefits for funds, their investors, and their managers.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Now is the time to turn FX challenges into opportunities<\/p>\n","protected":false},"featured_media":21156,"parent":0,"menu_order":0,"template":"","format":"standard","meta":{"_acf_changed":false},"practices":[70],"industries":[103],"capabilities":[104,109],"class_list":["post-21154","blog","type-blog","status-publish","format-standard","has-post-thumbnail","hentry"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v25.8 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Foreign exchange \u2013 how a heightened focus could improve investment returns and reduce costs - 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