Funds super-charge foreign currency exposure, hedging: NAB survey

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Australia’s superannuation funds are on the cusp of an historic shift to having more than half of their assets invested offshore, according to a NAB survey published today.

The NAB 2021 Superannuation FX Survey found that allocations to offshore investments jumped from 41% to 46.8% on average over the past two financial years, with 61% of funds reporting plans to further increase the amount invested in foreign assets.

NAB Markets Executive General Manager Drew Bradford said findings reveal some funds have already crossed the 50% threshold for the first time.

“This survey shows the move to increase offshore investments is continuing and funds are taking on more foreign currency exposure,” Mr Bradford said.

“Notably, many public sector funds have crossed the 50% threshold for the first time within the past two financial years.

“Currency is now the biggest investment risk in the portfolio after equity market risk and super funds are increasingly treating foreign exchange as an asset allocation, just as they would for any other asset class.

“What’s really interesting is that funds have started hedging more of that risk – reversing earlier declines – but continue to move away from traditional hedge ratios that used to dominate their offshore investments.”

The NAB 2021 Superannuation Fund FX Survey of 54 industry, corporate, retail, and public sector funds managing $1.81 trillion of Australians’ superannuation assets is NAB’s 10th biennial survey tracking the hedging practices of the industry. It covers a tumultuous period that included both waves of the COVID-19 pandemic, currency volatility in early 2020, the early release super scheme designed to buffer household incomes, the acceleration of fund mergers and the introduction of the ‘Your Future, Your Super’ reforms.

Despite the challenging economic period, the survey also found:

  • The top 20 balanced funds closed out the 2020-21 financial year with an average return of 18%.
  • Funds that fully hedged their AUD/USD exposure during the 2020-21 financial year would have added approximately 6% to member returns.
  • Funds employing a foreign currency target decreased their desired exposure since the 2019 survey.
  • Funds that applied a hedge ratio to their international equity exposure had an average target hedge ratio of 33%, up from 29% in the 2019 survey and the first gain since the 2015 survey.

Large super funds were the most inclined to increase their exposure to international equities, according to 75% of survey respondents. They cited the breadth of opportunities relative to the domestic market, more attractive pricing, and the desire to follow peer group asset allocations among their key motivations for allocating funds offshore.

The survey found that as funds were moving offshore, they were also seeking more exposure to unlisted assets with private markets – including debt – unlisted real estate and infrastructure among their favoured targets.

The recently introduced ‘Your Future, Your Super’ reforms designed to improve the accountability of funds have also become a significant factor in managers thinking about foreign currency. The reforms allocate pass or fail marks against set of benchmarks set by the Australian Prudential Regulation Authority (APRA) and are expected to lead to greater scrutiny and ongoing monitoring of currency effects on performance. APRA assumes funds fully hedge international exposures to fixed income, property, and infrastructure while ‘other’ assets are assumed to be 75% hedged.

Association of Superannuation Funds of Australia Chief Executive, Dr Martin Fahy said the survey findings provided valuable insights into the trends shaping returns across the $2.26 trillion super industry.

“The rise of allocations to international assets shows no sign of slowing and has been a significant factor in the high investment returns funds have enjoyed for the past two years. That this trend has continued through the unprecedented dislocations suffered by the global economy due to the pandemic is testament to the systems and people in place to protect and grow Australia’s retirement savings,” Dr Fahy said.

Amid continuing mergers, many funds have continued to build their in-house investment capability and these teams are more influential than ever in currency decisions, the survey reported. They showed their worth in the initial stages of the pandemic when decisions about hedging and rebalancing portfolios needed to be made quickly.

“It’s really pleasing to see that the superannuation industry has continued to develop the capabilities to manage such big and fast-growing pools of assets offshore,” Mr Bradford said.

The NAB 2021 Superannuation FX Survey was launched today at the virtual NAB Super Fund Conference in Melbourne.

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