To put the importance of the currency decision into perspective, if an Australian fund invested in the MSCI World Index over 2008 was 100 per cent hedged it would have returned a positive 3.5 per cent. If it was 100 per cent unhedged, it would have returned a positive 22 per cent. That would have been the difference between making it a top-quartile fund or a bottom-quartile one.
Leigh Watson, executive general manager, Asset Servicing, for NAB, said that currency was one of the most important issues facing super funds and many funds managers, which has been highlighted by the events of the past year or so.
The biannual NAB Superannuation FX survey of super funds’ attitudes to currency management and aggregate positions shows that the most important change among funds is that they tend to be adopting a total portfolio approach to what they hedge, rather than having separate currency benchmarks for each asset class.
Another trend is a recent swing back to active currency management, which peaked in the late 1990s and fell away after the technology bubble burst (see separate survey report: page 17).
Steve Merlicek, the former chief in- vestment officer for Telstra Super, who last month resigned to move to funds manager IOOF, said Telstra Super had been using a dynamic currency overlay, managed by Pareto Partners, for about 10 years.
“It means our losses have usually been not that bad and we have received most of the gains,” he said.
Telstra Super also has a passive hedge, through National Australia Bank’s Asset Servicing, for 50 per cent over its international alternatives.
It has historically hedged separately by asset class but was looking at a port- folio approach, Merlicek said. The fund was also looking at using option-based strategies to enhance returns.
To Hedge or Not to Hedge
On the question of whether or not to hedge, currency had the potential for risk and return and so should be evaluated in the same way as any asset exposure, Graeme Miller, the head of investment consulting for Watson Wyatt, said.
“Watson Wyatt has a view, which is somewhat controversial, that Australian interest rates are persistently higher … so the carry trade will persist (borrowing in lower interest rate countries, such as Japan or USA, and lending in higher rate countries like Australia),” he said. “But there are diversification benefits. A currency hedge can act as a powerful diversifier, especially in stressed times, and this alone makes hedging very attractive. In times of stress, the correlation spikes to negative one for currency.”
