CHART: Here's How Much Currency Hedging Has Added To Super Fund Returns In The Past Decade

Superannuation funds are investing more than ever in overseas markets, with offshore assets accounting for about 40% of a total $1.5 trillion held by funds across Australia.

NAB’s Superannuation FX Survey 2013 found offshore assets accounting for a growing percentage of funds, up from 35% in December 2010.

The bank said currency had become a growing issue for super funds, because of recent exchange rate volatility and their growing overseas investment portfolios.

NAB found that unhedged foreign equity investments would have lost 37% due to the currency in the past decade, compared to a 25% gain if they were fully hedged.

“Over the last five years, by doing nothing more than passively hedging all the currency exposure associated with investing in the MSCI World (excluding Australia) Index, superfunds would have added an average of 3.3% per annum to the returns on foreign assets,” said Danica Hampton, Director, Currency Overlay at NAB.

“On the flipside, if currency exposures were left unhedged, currency would have subtracted 1.6% per year from the returns on their international equity portfolio.

“If, on average, Australian superfunds are 18.2% exposed to currency then cumulatively superfunds have forgone an additional 0.9% of return per annum over the last five years.”

However, NAB noted that a decision to be fully hedged in the 2012-13 financial year would have hurt returns, with the AUD falling more than 10% throughout the year.

“A decision to be fully hedged over the last financial year would have reduced international equity portfolio returns by approximately 7.6% (+1.2% to +8.8%),” Hampton said.

“What you decide to do with currency could make the difference between whether you sit in the upper or lower quartile of the leader board in any given year.”

David Gonski, chairman of the Australian Government’s Future Fund revealed in June that 70% of the fund was invested offshore, and about 27% of the overall fund was unhedged. The fund was estimated to have made more than $2 billion from the AUD’s fall.

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