Fiduciary investors claim to have learned their lessons from the Australian dollar’s freefall during the second half of 2008, and are prepared for the possibility of a dramatic retreat from parity with the US$. The chief investment officer of the $30 billion AustralianSuper, Mark Delaney, said the fund’s policy for some time had been to hold a 17 per cent foreign currency exposure within its default balanced fund. “We always review that number, but we’ve yet to see any reason to change it,” he said. “Hitting that $1 US mark, it’s obviously a high-profile figure but in practice it’s just the continuation of a long-term trend of US dollar decline.”

He said AustralianSuper’s attitude to currency hedging veered toward the passive rather than the active, with foreign currency exposure seen as a “useful diversification tool” rather than a source of alpha, although he said the 17 per cent level was meaningful enough to provide an offset if Australian shares fell, and provide a windfall if the Australian dollar fell too. A more tactical approach has been taken by David Hartley, the chief investment officer of the $16 billion Sunsuper, who said the fund had been buying US$ as parity with the ‘Aussie’ loomed, and it was now testing the upper limits of its strategic currency exposure, which is able to go 5 per cent above or below Sunsuper’s underlying level of foreign-denominated assets.

Since 2008, Hartley said every fund had been encouraged by APRA to strengthen its liquidity management processes, and that this had become easier in the currency hedging universe. “It’s much easier to spread the maturities of your currency forward contracts these days,” he said. “All the liquidity used to be in the three-month contract against the $US, and if you wanted 6-, 9- or 12 month stuff you had to give up quite a bit in terms of yield. That’s not so much the case any more, and it’s allowed funds to calibrate themselves better should there be another sudden 40 per cent drop in the Aussie.” A combination of partial hedging, and hedging using such longer-term contracts, is the advice which Access Capital Advisers is giving its clients, according to CEO Alexander Austin.

One of his clients, MTAA Super, learned the hard way that short-term currency rolls can become prohibitively expensive at times of excessive volatility. In 2008, MTAA Super’s policy was to be passively hedged 100 per cent to the Australian dollar on its offshore unlisted assets, and 50 per cent of its listed portfolio. Starting around August of that year, the Australian dollar fell from 96 cents to 62 cents in about 14 weeks. The losses on the settlement of currency forwards became too much for the cash-strapped fund, which around this time was nearing its peak overall exposure to unlisted assets of over 70 per cent as equity markets plunged. The board decided not to renew its hedges around October 2008, hoping that the dollar would fall further. In fact, the dollar rallied from its 62 cent low to reach 85 cents by June 2009. MTAA Super introduced active currency management through Pareto Partners in May 2009, but not before the $A value of its offshore investments was hammered.

Leave a comment