More Australian Pensions Use FX to Protect Portfolio From Shocks
(Bloomberg) -- Australia’s pensions funds are increasingly using the Aussie dollar as a natural buffer to offset overseas market shocks, even as they raise currency hedging.
Currency hedging for offshore equity portfolios increased for the first time since 2015, according to National Australia Bank Ltd.’s Superannuation FX Hedging Survey of 54 portfolios published Tuesday. Yet at 33% hedged, this is still well below the 75% level that regulators deem neutral.
“There is evidently a strong bias to maintaining an underhedged position -- or higher foreign currency exposure -- as a potential buffer against any significant ‘risk off’ event,” the report said. Almost one-third of funds are also not fully hedging currency exposure in asset classes outside international stocks, it said.
While the Aussie tends to fall during global market shocks, making overseas investments more valuable when repatriated home in the local currency, the Australian Prudential Regulation Authority’s performance tests for the industry assume funds fully hedge exposures to infrastructure, property and fixed income.
Almost two thirds of the nation’s retirement funds expect to increase allocation to stocks, infrastructure and property outside Australia in the coming two years, according to the survey. This comes as APRA ramps up scrutiny over funds investment performance as they manage more money offshore in a bid for higher returns and diversification.
Three quarters of the nation’s retirement funds now consider currency in terms of a target exposure rather than a traditional hedging ratio, up from 57% in 2019, the report found.
“Currency is now the biggest investment risk in the portfolio after equity market risk,” said Drew Bradford, executive general manager for markets at NAB. “Super funds are increasingly treating foreign exchange as an asset allocation, just as they would for any other asset class.”
Spirit Super Chief Investment Officer Ross Barry agreed that the currency can act as a kind of natural hedge, while also cautioning against assuming this will always be the case.
“The Australian dollar has tended to play that role a little bit because it’s tended to fall in periods of risk off, particularly by virtue of falling commodity prices and other effects of a slowdown in global growth,” he said on Bloomberg Television. “We’ve always got to be a little bit careful when relying on historical relationships to hold in the future.”
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