The comeback of retail master trusts against industry funds in the performance stakes will face a headwind if the Australian dollar remains high, because their average strategic hedging level is much lower, according to data from Chant West Financial Services. “To the extent that anyone’s not 100 per cent hedged, they are suffering at the moment,” UniSuper’s chief investment officer John Pearce said last month, and master trusts will be suffering most of all given their average 27 per cent hedging level as at June 2009.

Master trust growth options outperformed their industry fund equivalents over the year to September 30 (1 per cent net of fees and tax versus a 0.1 per cent loss for the industry funds) as listed markets rallied, however with industry funds hedging at 37 per cent, Chant West founder Warren Chant said that lead would soon be pegged back if the Australian dollar continued its run toward US dollar parity. The biggest beneficiaries of a stronger-for-longer dollar would be public sector funds (average 60 per cent strategic hedging level) and corporate funds (44 per cent), according to the Chant database.

Super funds who continued to hedge their currency exposures as the Australian dollar fell to about US 60 cents in 2008 have seen their commitment rewarded as the local currency’s steady rise diminished returns for those with a neutral currency hedge in place, or none at all. “A lot of funds had high hedges last year, and at some stage you are forced to back away from that if it’s hard to fund them,” Margaret Waller, the head of currency manager Pareto Partners’ Australian business, said. It is understood the $6 billion MTAA Super maintained a full currency hedge as the Australian dollar began to depreciate sharply in September 2008.

It then took the hedge off and benefited from the weaker dollar. “We, like a lot of funds, have large offshore exposures and had issues with the Australian dollar falling,” Leanne Turner, deputy executive director, superannuation at MTAA Super, said. But as the Australian dollar rose in value, unhedged exposures offshore were worth less when converted into the home currency. Chant says that funds which have been unhedged since March – such as retail balanced growth funds like ING Optimix, IOOF and SMF – have suffered a full 5 per cent performance shortfall.

“If you didn’t have more than a benchmark hedge, you didn’t protect yourself against the rising dollar,” Waller said. In May, MTAA Super appointed Pareto Partners to run an active currency overlay across the fund’s offshore exposures, which mainly consist of international equities and unlisted assets. Unlike a passive currency overlay manager, which maintains a ‘neutral’ hedge of about 50 per cent across offshore exposures, an active manager adjusts the hedge between zero and 100 per cent, depending on the risk. For MTAA Super, Pareto mitigates the impacts of changes in the value of the US dollar, sterling, yen, euro and Canadian dollar. “At the moment we’re fully hedged on a lot of our currencies. Last year, we took hedges off when the Australian dollar started to tank. We added a lot of value,” Waller said.

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