Australia Pensions Take More FX Risk for Returns as Rates Plunge

(Bloomberg) -- Australian pension funds are taking on more foreign-currency risk, allowing them to be more responsive to global market conditions as they strive to preserve returns in a low interest-rate environment, according to a National Australia Bank Ltd. survey.

Superannuation funds are hedging less of their international equity exposure than they were two years ago, the 2019 NAB Superannuation FX Survey found. The so-called hedge ratio applied to international equities has fallen to 29% from 39% in 2017 and 50% in 2015. This reflects the decline in the Australian dollar from above 80 U.S. cents at the time of the last survey in 2017, said Drew Bradford, National Australia Bank’s executive general manager markets.

“Currencies have come of age in terms of how the superannuation industry is thinking about them,” Ray Attrill, head of foreign-exchange strategy at the bank, said at a briefing in Sydney. “Increasingly, funds want to think about their currency decisions independently from the decisions that they make about the underlying asset classes that they hold, which arguably says that the currency is acting as something of a diversifier.”

Among the biennial survey’s findings:

• 72% of super funds surveyed plan to increase their share of offshore investments over the next two years
• They favor unlisted assets such as private debt, private equity, infrastructure, real estate
• Funds have on average 41% of their assets offshore
• Despite increasing allocations to emerging markets, 58% of super funds don’t hedge the currency exposure on equities. Of those that do hedge, 82% are doing so through proxies
• Internal investment teams are playing a more influential role in currency decisions

Australia’s superannuation funds have been sending more money offshore as the mandatory retirement savings pool of A$2.8 trillion ($1.9 trillion) is forecast to hit A$5.4 trillion within a decade. AustralianSuper Pty, the nation’s largest pension fund, is opening an office in New York and expanding in London as it ultimately sees two-thirds of its portfolio invested outside Australia.

Their decision to hold more foreign-exchange exposure comes as the Australian dollar has tumbled about 4% this year, with the escalating trade war weighing on global growth and prompting the Reserve Bank of Australia to cut interest rates twice so far in 2019. The Australian dollar is likely to trade below 70 U.S. cents for the next few years, according to forward contracts.

More super funds are looking at currency risk through the same lens as other asset classes, which shows a “seismic shift in thinking” away from traditional hedging ratios, Bradford said. But he noted that as funds get bigger it’s also harder to broaden out and find other assets.

Currency exposure provides a hedge against declines in risk assets because a drop in the Australian dollar means funds get more when they repatriate money, Attrill said.

National Australia Bank surveyed 61 Australian super funds with A$1.82 trillion of assets under management.

--With assistance from Matthew Burgess.

To contact the reporter on this story: Andreea Papuc in Sydney at apapuc1@bloomberg.net

To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Joanna Ossinger, Edward Johnson

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