NAB’s biannual Superannuation FX Survey has found the interest in increasing a fund’s share of investments is particularly strong among larger funds, with more than $25 billion in assets under management (AUM).
According to the report, 85 per cent of larger funds indicated they will be increasing offshore allocations, while 61 per cent of funds managing $5 billion to $25 billion said they would be raising their international exposure.
The study examined 61 super funds, managing $182 trillion, which according to ASFA data, are around 90 per cent of industry AUM, excluding self-managed super funds.
For smaller funds, managing less than $5 billion, 67 per cent said they would be increasing their offshore allocations.
The results show on average, funds have 41 per cent of their assets offshore.
In particular, funds indicated they are likely to increase their relative allocation to unlisted international assets, including private debt, infrastructure and real estate.
Jamie Bonic, head of FX investor sales at NAB said the growth of foreign investments reflected that currency is going to become only more significant.
He commented with “41 per cent of international assets, it won’t be long that we’re through 50 per cent.”
“You’re going to have maybe the third largest nominal pension structure pocket of money in the world, not per capita, but nominally, and 50 per cent, or more of those investments held offshore. That’s enormous.
“Currency very clearly is going to play an enormous part of that decision making.”
Drew Bradford, executive general manager, markets at NAB said the survey gives a snapshot of what Australian super fund managers are thinking and how they plan to approach investment strategy and foreign exchange risk in a low interest rate environment.
“The results show that at the same time that funds are increasing their offshore holdings, they are hedging less of their FX exposure to take on more FX risk,” Mr Bradford said.
“This is because they want to be more responsive to market movements, such as a perceived large undervaluation or overvaluation of the Australian dollar.”
Funds shifting from active managers to internal teams
Internal investment teams are playing a more influential role in setting strategy for currency decisions, with larger funds building their capabilities according to NAB.
The report noted an uptick in respondents selecting “other” when asked who sets their strategic currency hedging policy, from 36 per cent in 2017 to 49 per cent this year.
The majority of these funds answering “other” signalled they are using internal teams, although consultants were still found to have a significant role particularly for smaller funds.
The research also showed funds are now reviewing currency risk on a more regular basis, with an increase in “other”, to 40 per cent from 30 per cent two years ago. When asked further, “other” usually meant more frequently than monthly.
Mr Bonic said the move to have internal foreign exchange investment teams is a trend in the broader industry.
“I think that this survey showed with the change to currency targets and the way they’re internalising that decision-making process, that they want to be able to make informed decision. They recognised there’s opportunity to create value from currency,” Mr Bonic said.
“So they’re more opportunistic, they want to build the expertise to make that informed decision, rather than giving some odd cash to an alpha creating, active manager, and that’s a shift.”
Moving away from hedging ratios
The average hedge ratio applied to international equity exposure has fallen to 29 per cent in 2019 form 39 per cent in 2017, the survey found.
Mr Bradford said the drop likely reflected the downtrend in the Australian dollar, down from 80 US cents two years ago to its current 70 cents, with an expectation that the currency could fall further.
However the research found funds are increasingly using target percentages for their foreign currency exposure, rather than traditional hedging ratios, with 57 per cent favouring target percentages.
For those funds targeting a percentage of foreign currency exposure, the average desired exposure is 24 per cent in 2019, based on the MySuper or default option of the fund.
