However, the survey did reveal super funds are now willing to take a more active approach to currency management. “A very high number of funds (80 per cent) use a specialist manager to implement their currency strategies,” the NAB report states. “Importantly, 36 per cent now use active currency managers compared with a low of 16 per cent in 2007.
About 60 per cent of super funds will have some benchmark tilting program, based on movements in or outlook for the Australian dollar.”
Furthermore, super funds are adjusting their overall approach to foreign exchange with 41 per cent assessing it on a total portfolio basis rather than the traditional method of strictly matching currency exposure with underlying assets.
Hampton says there’s something of a sea change happening as investors adopt the total portfolio approach to currency management. “Now people are thinking… currency is a useful diversifier and [asking] how much currency exposure do I want on my portfolio?” she says. As well, Hampton says investors are taking a much stronger interest in the currency hedging details.
“Investors now realise that currency strategy actually matters – even if it’s just passive management,” she says. “The way you structure the hedge; what instruments you use; what time of the month you set them; which currency basket you use in the foreign exposure – all of these things can have a material effect on hedged returns,” explains Hampton. “And if the currency is very volatile, [how you hedge] can have a material effect on overall portfolio returns.”
For instance, Hampton says that currency-hedging option strategies – more typically employed in the export sector – are becoming increasingly popular among large institutional investors in place of the usual forward contracts.
“It’s not all about using options and ditching forwards, but people are more open now to considering different possibilities [for managing currency risk],” she explains.
Playing FTSE
One currency-hedging possibility is available from global indexing firm, FTSE. Its Wealth Preservation Unit (WPU), launched globally in February, is a single currency unit constructed from a basket of developed and emerging currencies, and storable commodities designed to reduce currency risk. According to Peter Gunthorp, director of FTSE’s Research Analytics, with the traditional reserve currencies of the US dollar and euro in decline, and emerging market currencies on the rise, investors need a more diversified hedging strategy.
“Each component of the FTSE WPU mitigates against a particular source of risk, including a reduction in concentration risk in developed currencies (including 6.89 per cent in the Australian dollar), the hedging of a devaluation of developed currencies against BRIC currencies (as a proxy for emerging markets), and hedging against loss-of-purchasing-power risk as a result of inflation (through a small allocation to gold and oil),” he says.
