They tended to be more defensive, being highly hedged, but they then had a problem with cashflow risk. Whether or not currency is an asset class is a moot point. If it is, then it is a very different asset class. According to Liesching, currency is not a “strategic asset class”. It is an exposure, with no direct capital being invested. Currency forwards offer no cashflow. And there is no expected return to developed market currencies. He said currency was a “tactical asset class”. Currency exposure placed capital at risk, by investing contingent capital. The return came from active management, not passive exposure, he said. “It is an asset class as it can bring desirable risk reduction and return enhancement into the investment portfolio.” Because risks and issues change, so should a fund’s currency policy. “Some movement in the Australian dollar will force you to change your currency hedging position,” Liesching said.

Risk, count erparti es and liquidity Risk is not volatility, according to Michael Block. Nor is it something with reference to correlations alone. The general manager, investments, for FuturePlus Financial Services said risk should include some consideration of liquidity and valuations. “Thus, I believe that recent low equity prices have significantly less risk than equities in 2007 despite the increased volatility,” he said. “After all, equities can only fall half as much as they could in 2007.” Block said if you believed asset consultants and quantitative analysts then you would believe that a dangerously overpriced equity market which had exhibited low volatility was a low-risk investment and that corporate bonds with dangerously low credit spreads and low recent correlations to equities was a low-risk investment. A lesson from the financial crisis is that an investment in international equities may not be what it seems, due to securities lending and changes in value for the collateral used. “How many of you thought that your international equity trust could give you unwanted exposure to debt in place of equities?” Block asked.

“Regardless of the investment fundamentals, I would have thought that if I invested $100 million in an international equities trust I would have $100 million of exposure to equities and would be protected from changes in value to collateral used for securities lending. Lesson learned.” He said pooled investment vehicles, compared with segregated or discrete mandates, added to investment risk because of the lack of control for the beneficial owner. Liquidity – the ability to trade at a fair price in a reasonable time – was not guaranteed in listed markets, Block said. “How long would it take to realise a small-cap portfolio and could it be done at existing market prices?” The two paths confronted by defined contribution funds were to divest themselves of all-but liquid listed investments and/or to refine their offerings to avoid mismatches (of daily or weekly liquidity for members but not with their investments).