Super funds have continued to increase their allocations to offshore investments in the past two years, and a majority plan to continue this increase in the future.
A NAB survey of 54 super funds managing $1.81 trillion in assets found that average allocations to offshore investments increased from 41 per cent to 46.8 per cent in the two years since 2019.
“This survey shows the move to increase offshore investments is continuing and funds are taking on more foreign currency exposure,” said NAB markets executive general manager Drew Bradford.
NAB reported that many public sector funds had already exceeded 50 per cent allocation to offshore investments during the past two 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,” said Mr Bradford.
“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.”
Sixty-one per cent of funds said they intended to continue to increase their investments in foreign assets in the future.
Super funds that employ a foreign currency target had decreased their desired exposure since NAB’s last survey in 2019, while funds that apply a hedge ratio to their international equity exposures were found to have increased their target hedge ratio from 29 per cent to 33 per cent on average.
According to NAB, funds that fully hedged their AUD/USD exposure in the past financial year would have added about 6 per cent to the returns of their members.
Seventy-five per cent of respondents said that large super funds were the most inclined to increase exposure to international equities due to a wider range of opportunities available, more attractive pricing and to keep their asset allocations in line with their peer group.
“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,” said Association of Superannuation Funds of Australia chief executive Dr Martin Fahy.
“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.”
