Are you considering currency management? We’ve recently heard a lot of institutional investors talking about their fund’s currency exposure. From Callan’s viewpoint, this is a natural conversation given where we are in the currency cycle and the negative impact currency exposure is having on a lot of equity portfolios. Further, this particular cycle is hitting at a time when many institutional portfolios have more non-U.S. dollar exposure than ever, making the event particularly painful. However painful, we feel it’s important to remind investors to consider the context of the issue, and to rely upon a documented currency policy to guide decisions in times like the present. In the following 10 charts we offer such context for this discussion. These graphical representations of relevant data over time help to frame the issues equity investors face around currency, including asset allocation, currency returns, risks, and correlations. Callan recommends a measured approach to managing currency, including creating a documented currency policy for the investment fund to ensure short-term decisions made during painful times are in line with long-term strategic goals of the plan.

1. CALLAN
INVESTMENTS
INSTITUTE
10 Charts to Help Frame a Policy
First Quarter 2016
Considering Currency Hedging in
an Equity Portfolio

2. Knowledge. Experience. Integrity. Currency – First Quarter 2016
We’ve recently heard a lot of institutional investors talking about their fund’s currency exposure. From Callan’s viewpoint, this is a
natural conversation given where we are in the currency cycle and the negative impact currency exposure is having on a lot of equity
portfolios. Further, this particular cycle is hitting at a time when many institutional portfolios have more non-U.S. dollar exposure than
ever, making the event particularly painful. However painful, we feel it’s important to remind investors to consider the context of the
issue, and to rely upon a documented currency policy to guide decisions in times like the present.
In the following 10 charts we offer such context for this discussion. These graphical representations of relevant data over time help to
frame the issues equity investors face around currency, including asset allocation, currency returns, risks, and correlations. Callan
recommends a measured approach to managing currency, including creating a documented currency policy for the investment fund to
ensure short-term decisions made during painful times are in line with long-term strategic goals of the plan.
If you don’t have a documented policy on whether or not to hedge currency exposures in various asset classes, Callan
recommends you establish one. We believe it’s paramount to separate policy from implementation. Currency hedging can impact
the total fund or be targeted at individual asset classes. A brief look at hedging ratio options, ways to manage currency, and current
events will leave you with a better understanding of the issues at play around currency hedging, and feel more confident in following a
disciplined approach to currency management that is in line with your fund’s long-term goals and risk profile.
See the Appendix for issues to consider in establishing a currency policy. Contact your Callan consultant or the authors with further
questions: institute@callan.com
Are you considering currency management?
These 10 charts will help frame the issue
1

3. Knowledge. Experience. Integrity. Currency – First Quarter 2016
1990 2015
2
1. Institutional investors have more non-U.S. exposures than ever
● Over 25 years, we note a substantial increase in exposure to non-U.S. equity and fixed income investments for corporate (3% to
20%) and public funds (3% to 17%). Non-U.S. equity is typically a fund sponsor’s largest non-U.S. dollar-denominated exposure.
● The higher the currency exposure in the plan, the more it potentially contributes to volatility.
● While non-U.S. equity allocations have risen materially since 1990 (2% to 13% for corporate plans, 2% to 9% for public
plans), currency obtained through real estate and private equity have also ramped up. However, exposure is much harder to
quantify in these privately traded asset classes.
Investments that have performed poorly due to currency hurt more than ever
Sources: Callan’s Corporate and Public Fund Sponsor Databases.
Real Estate
Other Alternatives
Cash
Hedge Funds
U.S. Balanced
U.S. Fixed
U.S. Equity
Global Balanced
Non-U.S. Equity
Global Equity
Non-U.S. Fixed
1990 2015
Average Corporate Fund Asset Allocation
Asset
classes with
no currency
exposure
Asset
classes with
currency
exposure
97%
3%
80%
20%
Average Public Fund Asset Allocation
97%
3%
83%
17%

4. Knowledge. Experience. Integrity. Currency – First Quarter 2016
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 20152016
-75.0
-50.0
-25.0
0.0
25.0
50.0
75.0
100.0
Cumulative Returns for 15 Years ended March 31, 2016
CumulativeReturns
57.6 - Australia
-38.9 - Brazil
21.7 - Canada
28.9 - Europe
11.5 - Japan
-44.6 - Mexico
80.2 - Switzerland
2.0 - Taiwan
1.1 - UK
-29.6 - India
28.0 - China
-56.9 - Russia
2. Negative currency returns in past 2 years = concerned investors
● Looking at the last 15 years, we note a large dispersion in currency returns.
● From 2013 to present, currency returns have been mostly negative relative to the U.S. dollar.
Sources: Callan, MSCI. European return series is the Deutsche mark through December 1998 and the euro thereafter.
3

5. Knowledge. Experience. Integrity. Currency – First Quarter 2016
0.0000
20.0000
40.0000
60.0000
80.0000
100.0000
120.0000
140.0000
160.0000
1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015
3. Historical currency movements put the current pain in perspective
● The U.S. Dollar Index measures the value of the dollar relative to a basket of foreign currencies of significant trading partners
● We observe a general downward trend (USD weakness) with periodic spikes to the positive (USD strength)
U.S. Dollar Index: January 1973 – April 2016
Source: Federal Reserve
Last price 89.891
High on 03.01.1985 143.906
Average 94.411
Low on 08.01.2011 69.025
4

6. Knowledge. Experience. Integrity. Currency – First Quarter 2016
4. Currency returns can hugely affect total return for USD investors
● Sometimes currency effect is positive, other times not
● Sometimes currency moves with equity returns, other times against
Impact on MSCI EAFE Returns: 1971 – 2015
*EAFE local until 4Q1987, EAFE hedged thereafter.
Sources: Callan, MSCI.
Through 2015 1-Year 3-Year 5-Year 10-Year 20-Year 40-Year*
MSCI EAFE (hedged)* 5.0 12.1 7.8 3.8 5.6 8.2
Currency Return -5.8 -7.1 -4.2 -0.8 -1.2 1.1
MSCI EAFE -0.8 5.0 3.6 3.0 4.4 9.3
-50
-25
0
25
50
75
201520102005200019951990198519801975
Currency
Return
MSCI EAFE
(hdg)*
Currency detracted 16% in
2005, dampening overall
positive returns
5
Currency added 28% in 1985,
boosting an already positive year

7. Knowledge. Experience. Integrity. Currency – First Quarter 2016
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15
16
5.0
10.0
15.0
20.0
25.0
30.0
Rolling 5-year Standard Deviation for 35 Years ended March 31, 2016
StandardDeviation
14.8 - MSCI EAFE
13.8 - MSCI EAFE (hdg)*
18.7 - MSCI EAFE Average
17.0 - MSCI EAFE (hdg)* Average
5. Does currency hedging reduce equity volatility?
● Currency is not always additive to volatility (periods of low correlation to underlying equities).
● In recent rolling five-year periods, currencies have added to volatility.
Sometimes.
*EAFE local until 4Q1987, EAFE hedged thereafter.
Sources: Callan, MSCI
6

8. Knowledge. Experience. Integrity. Currency – First Quarter 2016
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
-1.00
-0.75
-0.50
-0.25
0.00
0.25
0.50
0.75
1.00
Rolling 5-year Currency Correlation Relative To MSCI EAFE Local Currency for 25 Years ended March 31, 2016
Correlation
-0.6 - Japan
0.2 - U.K.
0.1 - Euro*
6. Currency correlations to non-U.S. equity vary over time
● Currency’s contribution to EAFE (unhedged) volatility has risen in recent periods due to the higher correlation of sterling and euro to
EAFE equities (MSCI EAFE local currency).
● The yen continues to provide diversification (low correlation to EAFE equities).
*European return series is the Deutsche mark through December 1998 and the euro thereafter.
Sources: Callan, MSCI.
7

9. Knowledge. Experience. Integrity. Currency – First Quarter 2016
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15
16
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
Rolling 5-year Correlation Relative To S&P 500 for 35 Years ended March 31, 2016
Correlation
0.81 - MSCI EAFE
0.81 - MSCI EAFE (hdg)*
0.73 - MSCI EAFE Average
0.76 - MSCI EAFE (hdg)* Average
7. Currency correlations to U.S. equity vary over time, too
● EAFE (hedged) and EAFE (unhedged) have similar correlations to the S&P 500 Index.
● Hedging does not seem to significantly change the diversification effect of non-U.S. equity.
● Currency exposure (as seen through EAFE unhedged) adds marginal diversification relative to the S&P 500 Index.
*EAFE local until 4Q1987, EAFE hedged thereafter.
Sources: Callan, MSCI
8

10. Knowledge. Experience. Integrity. Currency – First Quarter 2016
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 1516
0.0
2.5
5.0
7.5
10.0
12.5
15.0
17.5
Rolling 5-year standard deviation for 25 Years ended March 31, 2016
StandardDeviation
7.2 - Citi Non-US WGBI
3.1 - Citi Non-US WGBI (hdg)
3.0 - Barclays Aggregate
10.0 - Citi Non-US WGBI Average
3.5 - Citi Non-US WGBI (hdg) Average
8. In non-U.S. fixed income, does hedging reduce volatility?
● Unlike non-U.S. equities, hedging non-U.S. fixed income materially reduces volatility.
● Decisions on whether to hedge non-U.S. fixed income must consider the unique characteristics and implementation of the asset
class.
All the time.
Sources: Callan, Barclays, Citi
9

11. Knowledge. Experience. Integrity. Currency – First Quarter 2016
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15
16
-12.5
-10.0
-7.5
-5.0
-2.5
0.0
2.5
5.0
7.5
10.0
Rolling 5-year Returns Relative to MSCI EAFE for 35 Years ended March 31, 2016
RelativeReturns
3.8 - MSCI EAFE (hdg)*
-1.1 - MSCI EAFE (hdg)* Average
9. Currency: To Hedge or Not To Hedge?
● Currency returns have been cyclical.
● The last period of sustained dollar strength was in the late 1990s.
● Where does the market go from here?
*EAFE local until 4Q1987, EAFE hedged thereafter.
Sources: Callan, MSCI
Currency detracts
Currency is additive
10

12. Knowledge. Experience. Integrity. Currency – First Quarter 2016
0.0%
20.0%
40.0%
60.0%
80.0%
Quarter ended March 31, 2016
Europe Emerging Markets Frontier Markets
North America Pacific Rim
12.7
17.4
1.7
64.2
4.1
10. Currency impacts U.S. equity returns too
● Earnings of companies in the
S&P 500 have exposure to
foreign currency.
● Investors can categorize stocks
by country of domicile…
● Or by country of economic
exposure.
● This chart shows economic
exposure of the S&P 500 Index.
● Whether you realize it or not, all
equity investors have exposure
to foreign currency.
S&P 500 Earnings – Percent from each region
Source: MSCI
11

13. CALLAN
INVESTMENTS
INSTITUTE
Currency Policy Issues to Consider
and Bonus Charts
Appendix

14. Knowledge. Experience. Integrity. Currency – First Quarter 2016
Issues to Consider in Establishing a Currency Policy
13
● The currency policy should incorporate the investor’s:
– Time horizon
– View on the role of currency in the total fund and individual asset classes
– Risk posture
● The currency policy should represent a long-term view
● The desired currency exposure will be expressed as a hedge ratio
– It can be at the total fund level, the asset class level, or both
– Hedge ratios generally range between 0% (fully unhedged) or 100% (fully hedged)
● The currency policy should also incorporate a statement of the method of implementation
– Statement of strategic objectives: risk reducing and/or return enhancing
– Active or passive
– Internal or external

15. Knowledge. Experience. Integrity. Currency – First Quarter 2016 14
Callan Periodic Table of Investment Returns: Currency
Annual Returns
Australia
7.45%
Australia
11.40%
Australia
-20.60%
Australia
28.99%
Australia
13.98%
Australia
0.01%
Australia
1.27%
Australia
-13.83%
Australia
-8.53%
Australia
-11.10%
Brazil
9.39%
Brazil
19.94%
Brazil
-23.67%
Brazil
33.78%
Brazil
5.01%
Brazil
-11.00%
Brazil
-8.90%
Brazil
-13.21%
Brazil
-11.25%
Brazil
-32.81%
Canada
0.38%
Canada
17.91%
Canada
-20.05%
Canada
17.76%
Canada
5.50%
Canada
-2.42%
Canada
2.26%
Canada
-6.29%
Canada
-8.27%
Canada
-16.62%
China
3.40%
China
6.86%
China
7.05%
China
-0.06%
China
3.60%
China
4.70%
China
1.02%
China
2.91%
China
-2.42%
China
-4.46%
Europe
11.79%
Europe
10.87%
Europe
-4.92%
Europe
3.22%
Europe
-6.50%
Europe
-3.24%
Europe
1.56%
Europe
4.52%
Europe
-12.18%
Europe
-10.23%
Mexico
-1.75%
Mexico
-0.80%
Mexico
-21.19%
Mexico
6.07%
Mexico
5.85%
Mexico
-11.62%
Mexico
7.46%
Mexico
-0.85%
Mexico
-11.14%
Mexico
-14.66%
India
1.69%
India
12.29%
India
-19.10%
India
4.70%
India
4.07%
India
-15.80%
India
-3.08%
India
-11.42%
India
-2.01%
India
-4.59%
Japan
-0.94%
Japan
6.66%
Japan
23.24%
Japan
-2.63%
Japan
14.78%
Japan
5.41%
Japan
-11.02%
Japan
-17.73%
Japan
-12.34%
Japan
-0.33%
Russia
9.18%
Russia
7.28%
Russia
-19.64%
Russia
0.73%
Russia
-0.70%
Russia
-4.97%
Russia
5.16%
Russia
-7.04%
Russia
-45.23%
Russia
-17.85%
Switzerland
7.97%
Switzerland
7.82%
Switzerland
6.37%
Switzerland
2.96%
Switzerland
10.91%
Switzerland
-0.32%
Switzerland
2.16%
Switzerland
2.92%
Switzerland
-10.50%
Switzerland
-0.73%
Taiwan
0.79%
Taiwan
0.46%
Taiwan
-1.17%
Taiwan
2.60%
Taiwan
9.70%
Taiwan
-3.71%
Taiwan
4.27%
Taiwan
-2.57%
Taiwan
-5.69%
Taiwan
-3.79%
UK
14.00%
UK
1.71%
UK
-27.77%
UK
12.32%
UK
-3.05%
UK
-0.74%
UK
4.59%
UK
1.89%
UK
-5.86%
UK
-5.47%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Sources: Callan, MSCI

16. Knowledge. Experience. Integrity. Currency – First Quarter 2016 15
Non-U.S. Currency Correlation Table
Periods ended March 31, 2016
Australia Brazil Canada China
(EEC)
Europe India Japan Mexico Russia Switzerland Taiwan UK
Australia
Brazil
Canada
China
Europe (EEC)
India
Japan
Mexico
Russia
Switzerland
Taiwan
UK
Correlation for 10 Years ended March 31, 2016
Correlation for 5 Years ended March 31, 2016
1.00 0.86 0.75 0.15 0.65 0.54 0.12 0.66 0.60 0.54 0.66 0.65
0.85 1.00 0.79 0.25 0.60 0.51 -0.01 0.70 0.63 0.45 0.61 0.62
0.75 0.82 1.00 0.17 0.52 0.43 -0.03 0.64 0.63 0.32 0.51 0.62
-0.07 0.11 0.29 1.00 0.28 -0.01 0.15 0.19 0.39 0.39 0.46 0.11
0.45 0.63 0.68 0.04 1.00 0.38 0.24 0.37 0.53 0.78 0.53 0.57
0.36 0.41 0.22 -0.20 0.24 1.00 0.00 0.61 0.44 0.39 0.41 0.35
0.31 0.07 0.23 -0.15 0.05 -0.08 1.00 -0.34 0.13 0.49 0.26 -0.19
0.65 0.68 0.60 0.11 0.47 0.69 -0.17 1.00 0.70 0.27 0.55 0.59
0.54 0.55 0.60 0.39 0.48 0.34 0.21 0.69 1.00 0.56 0.67 0.53
0.48 0.58 0.53 0.19 0.67 0.41 0.11 0.55 0.69 1.00 0.77 0.35
0.61 0.67 0.71 0.37 0.44 0.33 0.06 0.67 0.78 0.76 1.00 0.44
0.37 0.43 0.56 0.17 0.69 0.13 0.11 0.32 0.50 0.60 0.57 1.00
Sources: Callan, MSCI

17. Knowledge. Experience. Integrity. Currency – First Quarter 2016 16
About the Authors
Janet Becker-Wold, CFA, is a Senior Vice President and the Manager of Callan's Denver Fund
Sponsor Consulting office. Janet joined the investment management business in 1991. Her experience
at Callan includes all facets of investment consulting including investment policy analysis, asset and
liability studies, as well as manager search and structure. She has a particular expertise in international
investing and currency management. Her clients include corporate, public, and non-U.S. based funds.
Janet is a member of Callan's Management, Manager Search, and Defined Contribution Committees,
and is a shareholder of the firm.
Janet received an MBA in Finance from the University of Colorado and a BS in Biology from the
University of Texas. She earned the right to use the Chartered Financial Analyst designation.
Andy T. Iseri, CFA, is a Senior Vice President and a non-U.S. investment consultant in Callan's Global
Manager Research group. He is responsible for research and analysis in the non-U.S. and global asset
class including developed and emerging equities, issues surrounding currency management, as well as
matters related to ESG investing. He oversees manager searches, conducts on-site visits, and attends
finalist interviews. Andy is a shareholder of the firm.
Andy earned a BS in Business Administration - International Business at California State University,
Sacramento. He belongs to CFA Institute, CFA Society of Sacramento, and earned the right to use the
Chartered Financial Analyst designation.

18. Knowledge. Experience. Integrity. Currency – First Quarter 2016
Certain information herein has been compiled by Callan and is based on information provided by a variety of sources believed to be reliable for which
Callan has not necessarily verified the accuracy or completeness of or updated. This report is for informational purposes only and should not be
construed as legal or tax advice on any matter. Any investment decision you make on the basis of this report is your sole responsibility. You should
consult with legal and tax advisers before applying any of this information to your particular situation. Reference in this report to any product, service or
entity should not be construed as a recommendation, approval, affiliation or endorsement of such product, service or entity by Callan. Past performance
is no guarantee of future results. This report may consist of statements of opinion, which are made as of the date they are expressed and are not
statements of fact.
The Callan Investments Institute (the “Institute”) is, and will be, the sole owner and copyright holder of all material prepared or developed by the
Institute. No party has the right to reproduce, revise, resell, disseminate externally, disseminate to subsidiaries or parents, or post on internal web sites
any part of any material prepared or developed by the Institute, without the Institute’s permission. Institute clients only have the right to utilize such
material internally in their business.
© 2016 Callan
17

19. About Callan
Corporate Headquarters
Callan
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San Francisco, CA 94111
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Callan was founded as an employee-owned investment consulting firm in 1973. Ever since, we have empowered institutional clients with creative,
customized investment solutions that are uniquely backed by proprietary research, exclusive data, ongoing education, and decision support. Today,
Callan advises on $2 trillion in total assets, which makes us among the largest independently owned investment consulting firms in the U.S. We use a
client-focused consulting model to serve public and private pension plan sponsors, endowments, foundations, operating funds, smaller investment
consulting firms, investment managers, and financial intermediaries. For more information, please visit www.callan.com.
About the Callan Investments Institute
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Institute conducts conferences and workshops, and provides published research, surveys, and newsletters. The Institute strives to present the most
timely and relevant research and education available so our clients and our associates stay abreast of important trends in the investments industry.
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