Hedging gains currency
The relentless rise in the Australian dollar since 2001 has had a fundamental impact on the way Australian superannuation funds do business, with the vast majority now having strong hedge strategies, according to new research released by National Australia Bank’s nabCapital.
The research, released this week, also revealed that industry superannuation funds have increased their average hedge benchmark the most, from 27 per cent to 40 per cent between 2005 and 2007.
The research said international equities accounted for the largest part of Australian superannuation fund exposure to foreign currency assets and it was, therefore, this that had tended to define their overall hedging policy.
It said that across all the superannuation funds surveyed, the average hedge benchmark for international equity portfolios was 47 per cent and that there had, therefore, been a material increase since 2005, when the average hedge benchmark or international equity portfolio was 35 per cent.
“The most probable reason for this is that funds have tried to dampen the currency losses on foreign investments as the Australian dollar has persistently appreciated,” the research analysis said.
Commenting on the research findings, nabCapital head of insurance and fund manager relations Donald Hellyer said the substantial appreciation of the Australian dollar in recent years had tested funds’ resilience to currency losses.
“Currency hedging decisions over the past five years have helped define the difference between a top quartile international equity portfolio and a bottom quartile portfolio,” he said.
Hellyer said decisions made around setting or moving the hedge benchmark were likely to be more important as a source of performance than active allocation to countries or stock selection.
“Currency risk management is firmly on the agenda for Australian superannuation funds,” he said. “Over 70 per cent of funds surveyed consider currency matters to be important or very important to their investment committee.”
AUTHOR
Mike Taylor
Recommended for you
The shift in scale and consolidation has led to substantial growth in large privately owned licensees, which have tipped past 20 per cent of advisers for the first time to make up 28.3 per cent of the industry.
ETF providers Betashares and BlackRock are reporting increased flows for currency hedged vehicles, but an adviser has warned on the potential tax implications of changing currency.
Bravura chair Matthew Quinn is to step down later this year, following the exit of CEO Andrew Russell, while its future priority is digital advice in Australia.
Financial advice has an important role to play in navigating family discussions around inheritance, according to CFS, with younger generations expecting a windfall of more than $500,000 while older ones try to meet their retirement needs.
