Normal
0

false
false
false

MicrosoftInternetExplorer4

st1:*{behavior:url(#ieooui) }

/* Style Definitions */
table.MsoNormalTable
{mso-style-name:”Table Normal”;
mso-tstyle-rowband-size:0;
mso-tstyle-colband-size:0;
mso-style-noshow:yes;
mso-style-parent:””;
mso-padding-alt:0cm 5.4pt 0cm 5.4pt;
mso-para-margin:0cm;
mso-para-margin-bottom:.0001pt;
mso-pagination:widow-orphan;
font-size:10.0pt;
font-family:”Times New Roman”;
mso-ansi-language:#0400;
mso-fareast-language:#0400;
mso-bidi-language:#0400;}

The financial year just gone has been challenging for super funds
in so many ways, none more so than in the management of their currency expo­sures.
In one month alone, last October, two weeks of manic volatility left the Aussie
dollar reeling with a drop of US20c. Many super funds had to write very large
cheques to cover their cur­rency hedges. With the A$ back up over US80c, the
chances of a similar slump up ahead are not being discounted by market
observers.

According to Steve Lambert, a managing director and global head of
distribution for National Australia Bank, super funds tend to be more prepared
to wear short-term volatil­ity than the corporates and managers who participate
in the foreign exchange market, however, they are still reactive in changing
benchmarks. “There’s a continuing debate as to whether currencies are a
separate asset class, however we have probably moved on a bit from that,” he
said.

“There is now a greater awareness about the value of having the
systematic management of currency, whether this is outsourced or not and
whether it is active or a passive overlay.” NAB is hosting a one-day confer­ence
in Melbourne on August 27 for super funds and managers looking at various
aspects of currency manage­ment, including the big questions of whether to
hedge or not to hedge and, if so, by how much. NAB conducts a bi-annual survey,
the results of which will be analysed at the conference, which shows aggregate
hedging policies of super funds and other institutional investors.

The most
common hedge ratio traditionally has been about 50 per cent, but this figure
rose slightly in the past 12 months. The main result from the 2009 survey,
published late last month, is a big increase in concern about the cash impact
of hedging. This is because of the experience in 2008 when funds had realised
gains and losses on their hedging instruments at the same time as having
unrealised gains and losses on their underlying investments. When super funds
were asked in the 2007 survey what would provoke a change in their currency
benchmark only 13 per cent responded with ‘con­cern about the cash impact of
hedging’.

This figure jumped to 53 per cent in the 2009 survey. Peter Bray, the
head of foreign exchange institutional sales in Australia for NAB, said the need
for super funds to be competitive against their peers prevents most from going
100 per cent hedged, except in international bonds. “They don’t really want the
currency exposure but they’re still drawn to their peers,” he said. “The
half-way point between active and passive is becom­ing popular, which is
dynamic hedging. It fits in with markets being in a cycle because as the
currency rises you reduce the hedge and as it falls you increase the hedge.


It’s pseudo active.” Lambert said the currency markets have a lot of daily
noise, which makes it difficult for participants to look at long-term trends
such as purchasing power parity. Nevertheless, the nexus between currencies and
underlying econom­ics, particularly how the fundamentals impact on interest
rates, are unavoid­able, even by the most active of traders among the
specialist currency managers and hedge funds. “Currency strategists take the
long-term economic forecasts and embed them in their models,” Lambert said.
“For example, commodity prices and interest rate differentials reflect both
long-term trends and shorter-term factors.”

Normal
0

false
false
false

MicrosoftInternetExplorer4

st1:*{behavior:url(#ieooui) }

/* Style Definitions */
table.MsoNormalTable
{mso-style-name:”Table Normal”;
mso-tstyle-rowband-size:0;
mso-tstyle-colband-size:0;
mso-style-noshow:yes;
mso-style-parent:””;
mso-padding-alt:0cm 5.4pt 0cm 5.4pt;
mso-para-margin:0cm;
mso-para-margin-bottom:.0001pt;
mso-pagination:widow-orphan;
font-size:10.0pt;
font-family:”Times New Roman”;
mso-ansi-language:#0400;
mso-fareast-language:#0400;
mso-bidi-language:#0400;}

In many countries, particularly developing economies, fund flows
chas­ing currency moves, or foreshadowing them, can have a significant effect
on share markets. However, Lambert said, the more complex the market, such as
the G-7 economies, the less is the cor­relation between fund flows and market
moves. At the NAB conference, Donald Hellyer, NAB’s managing director,
insurance and fund manager relations, will present the detailed findings of the
latest client survey. He will also chair a debate on active versus passive
currency management.

A panel of consultants, chaired by Steve Merlicek, Telstra
Super’s head of investments, will look at the question ‘to hedge or not to
hedge’. The consultants are: Graeme Miller, head of invest­ment consulting for
Watson Wyatt, Ed Smith, head of currency for Frontier, and Steven Carew of
JANA. Another panel will look at the challenge with global portfolios in
transition management.

The panellists are: Jonathan Green of NSW T-Corp,
Dharmendra Dayabhai of UniSuper, Lounarda David of Mercer Sentinel, and Michael
Johnson of NAB Asset Servicing. Lewis Bearman, head of operations for Perennial
Investment Partners, will look at managing money internation­ally from Australia,
and Michael Block, the general manager, investments, for FuturePlus, will look
at risk, counter­parties and liquidity. Challenges presented by doing offshore
valuations, both in private and public markets, will be addressed by Tim Ridley
of Access Capital and Ray Lester of NAB Asset Servicing, while Marco Feltrin of
PricewaterhouseC­oopers will look at the tax treatment of foreign investments.

 

Leave a comment