The cash impact of paying currency hedges has soared in importance for super funds, following a disastrous year for many according to a survey by National Australia Bank.
The biennial survey of 34 Australian funds and 12 New Zealand funds conducted by NAB Wholesale Banking showed that funds have taken a far greater interest in currency since most of them lost significant sums last year after the Australian dollar plummeted from US98c to US60c in the space of three months. Luckily, for those which did not change their hedges, the Aussie dollar has subsequently recovered to trade around US80c.
But the NAB survey, conducted by Donald Hellyer, managing director of insurance and funds for NAB Wholesale Banking, showed that 53 per cent of funds indicated that the cash impact of currency hedges was the reason to change their hedge benchmarks, compared with only 12 per cent two years ago.
The cash impact, whereby funds have to cover the cost of hedging after a big currency movement, was the second-most important reason to change currency benchmarks, according to the survey. More than 70 per cent of funds said that a change in the value of the Aussie dollar was the main reason to change benchmarks.
Hellyer said that the trend over the past four survey periods (eight years) was for currency to be assessed by funds at the portfolio level rather than the asset class level.
“The most sophisticated funds will separate their currency exposures from where they’re investing,” he said.
The survey showed that super funds continued to alter their benchmarks, rather than maintain a consistent strategy, in the search for an optimal outcome.
Over calendar 2008, the impact of currency on international portfolios was huge – an MSCI ex-Australia equity portfolioreturned 22 per cent if unhedged but only 3 per cent if fully hedged.
NAB is holding a special one-day currency seminar in Melbourne on August 27.
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