Dealing with a sliding Aussie dollar

Many superannuation fund trustees have traditionally viewed foreign exchange risk with an element of suspicion, but the latest NAB Superannuation FX Survey suggests a two-year strengthening of the Australian dollar and its impact on investment returns has created better understanding of the category.

If two years is a long time in politics then it is an eternity in foreign exchange markets – something that has been solidly confirmed by the findings of the latest two-yearly NAB Superannuation FX Survey. 

It is axiomatic of foreign exchange markets that even in the three months over which the NAB team conducted this year’s survey, the Australian dollar has devalued rapidly from a position where, in late March it was sitting comfortably at about US$1.02 whereas at the start of July it had declined to around US92 cents. 

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Little wonder, then, that superannuation trustees have been sharpening their focus on the manner in which foreign exchange issues are impacting their investment outcome and, so far as is possible, hedging accordingly. 

Looking at the outcome of the 2013 NAB Superannuation FX Survey, NAB Director, Currency Overlay, Danica Hampton said the bottom line was that currency is still important, “and if anything, it’s becoming increasingly important”. 

Further, she believes that the past two years have seen superannuation funds increasing their level of focus on foreign exchange issues. 

“The key headline statistic is that 83 per cent of superannuation funds rate currency as an important issue for the fund, and that’s higher than the 73 per cent we saw in the last survey period,” Hampton said. 

She said she believed there were a lot of reasons why currency was becoming increasingly important, including an acknowledgement that “it’s quite difficult, and if you get it wrong, there’s a huge impact on the entire portfolio”. 

“Superfunds are invested more in offshore assets, and so, as a proportion of their entire portfolio, that is an increasingly important decision,” Hampton said. 

The NAB Superannuation FX Survey has consistently pointed to the caution with which superannuation fund trustees approach foreign exchange issues – something which suggests they regard it as a challenging part of their investment decisions. 

Hampton said the latest survey confirmed this continuing caution, with superannuation funds openly acknowledging this. 

“Interestingly, 80 per cent of superannuation funds think that no one is actually well-placed to predict the currency over the 12 month horizon,” she said.  

Hampton noted that notwithstanding the fact that the 2013 NAB Superannuation FX Survey had pre-dated the decline in the Australian dollar, one of the broad themes indicated by superannuation fund respondents had been the likelihood that such a downward trend was likely to occur. 

“While most agree that currency is difficult to predict, it doesn’t stop people from agreeing on broad themes,” she said.

“For instance, 67 per cent of the superannuation funds when we surveyed them thought that the currency would go lower, and consistent with that I guess, we’ve actually seen the currency fall quite significantly since the survey was completed.” 

Hampton said the survey also seemed to suggest that many of the superannuation fund respondents would not be overly surprised to see the Australian dollar go still lower. 

Looking at the recent decline in the value of the Australian dollar, Hampton said it seemed clear that many of the superannuation funds had been accurate in developing the key themes they had pursued. 

“Judging by the last six weeks, it seems like they’ve had good judgment on the key themes,” she said. 

The 2013 NAB Superannuation FX Survey suggests that trustees have deepened their understanding of how currency can affect portfolio returns.

Not only have some of their views proved prescient over the past two months, but superfunds seem better equipped to deal with currency risk going forward.

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