The strong Australian dollar has brought sharply into focus the importance of currency risk management for super funds.
Australia's soaring dollar could be doing serious damage to the returns of those super funds that don't adequately hedge their international shares exposure.
A survey released yesterday by NAB Capital showed that although 47 per cent of pension funds hedged their international equities exposure, a 1 per cent rise in the Australian dollar would cause $1.5 billion worth of foreign exchange losses.
As it stands, international equities account for one quarter of all superannuation investments.
NAB Capital head of fund manager relations Donald Hellyer said the appreciation in the Australian dollar in recent years has tested funds' resilience to currency losses.
"Currency hedging decisions over the past five years have helped define the difference between a top quartile international equity portfolio and a bottom quartile portfolio," he said.
"Decisions made around setting or moving the hedge benchmark are likely to be more important as a source of performance than active allocation to countries or stock selection."
The Australian dollar was trading at 23 year highs of 90 cents to the US dollar on Monday but had slipped back to about 89.25 cents by afternoon trading yesterday.
It has risen 8 per cent since mid September when the US Federal Reserve dramatically cut interest rates by 50 basis points, to 4.75 per cent, to stimulate its domestic share market.
The cut stimulated demand for Australian and New Zealand dollars. This is because interest rates in the two countries are at the highest levels for over a decade.
NAB Capital polled 38 of Australia's biggest pension funds.
It found that 64 per cent of them said a change in the value of the currency would cause them to alter their hedge benchmark.
This compared to just 31 per cent who said they would change their benchmark as a result of currency movements in 2002.
Fund managers and annual performance reports brim with confidence, no matter how much money has been made or lost, but where does this leave the humble investor?... read more »
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