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.”