Unhedged equities out of vogue

Investors need to explore ways of investing in international shares other than unhedged equities if they want to keep any of the gains they have made in the sector, according to Leanne Bradley, senior investment specialist at Aberdeen Asset Management.

Bradley said Australian investors traditionally invest in global equities in Australia on an unhedged exposure to take their currency risk of investing offshore, but any gains they made in global equities have been wiped out by the strength of the Australian dollar.

“There is a better correlation between unhedged international equities and Australian shares than there is between hedged international equities and shares.

“But ... we’ve gone through one of the strongest runs of the Australian dollar since it was floated, and as a result, any gains that have been made in international equities has been wiped out by the fact that the Australian dollar has strengthened and therefore [an investor’s] returns [on] unhedged are much lower,” she said.

“A lot of people need to realise that there are a number of ways to invest in international equities, not just unhedged,” Bradley said.

Bradley warned that the Australian dollar may not fall for a long time thanks to high interest rates and the resources boom and therefore investors may not necessarily make back what they lost from investing in unhedged global equities.

Investors would have done just as well in international equities than they did in domestic shares if they had hedged their shares, she said.

Some industry commentators recently observed that advisers were considering abandoning global shares when trying to develop portfolio construction strategies for their clients.

Recent figures from financial planning strategy provider Strategy Steps showed that domestic equities gave returns of 0.6 per cent over the last year to September, compared to -2.7 per cent in unhedged global shares.

The director of Strategy Steps, Assyat David, said domestic shares substantially outperformed unhedged global shares over both short and long-term periods, prompting advisers to think about the right mix between domestic and global share allocations.