National Australia Bank (NAB) yesterday released its 2017 Superannuation FX Hedging Survey, revealing Australia’s biggest super funds are changing their approaches to managing currency risk to adapt to the growing market, increasing transaction costs and new regulation.
Emma Lawson, Director Fixed Income Currencies & Commodities, said this survey provides a valuable insight in to how superannuation funds are managing Australians’ wealth.
“The environment in which funds operate is evolving quickly, incorporating more regulation, policy changes, pressure to grow and diversify, and technological change,” Ms Lawson said.
“Combine these headwinds with lower FX returns in recent times, and even lower market volatility, and you’ve got a case where super funds are adapting and responding to changing conditions.
The survey showed investment committees are increasingly turning to the expertise of internal strategists to make decisions on managing, or hedging, currency exposure. More than 35% said ‘others’ were making investment decisions, up from 10% in 2015.
Regulation was a significant factor in how superannuation funds set their currency hedging strategy in 2017 and is having an ever-increasing influence on decision making. While most funds are yet to focus on margining and collateral, 30% of funds are starting to do so, indicating they will be of greater importance in the years ahead.
Funds are also focused on the rising cost of transactions, with more than 70% of funds indicating they are considering, or already implementing, transaction cost analysis. Of those, 76% look to their manager or bank to provide this service, while 15% look for an independent provider and 9% do it themselves.
“NAB is here to support super funds in navigating the currency markets. It’s important to us that we back the proprietors and protectors of Australians’ wealth,” said Drew Bradford, NAB’s Executive General Manager Fixed Income Currencies & Commodities.
The NAB Superannuation FX Hedging Survey is Australia’s largest survey of superannuation funds, and the only one of its kind. The 2017 survey questioned 46 funds with $980bn assets under management, representing approximately 43% of the total industry.
Other key findings from the survey include:
- The majority of funds currently use an external overlay manager to implement trades, or hedges, to protect investment against currency exposures, however this is changing with 11% looking to in source, and 9% to outsource in the future
- Funds are increasingly hedging at the member investment-choice level, along with the whole-of-fund level. Implementation is often still done at the asset class level.
- Transaction cost analysis and reporting of ASIC guidelines is very important and most funds look to their asset manager or bank to do this.
- FX forwards remain the dominant product for hedges, with little change in cross-currency swaps and the use of options remained flat.
- There was a rise in emerging market exposure and a significant drop in emerging market currency hedging.
About the Survey
The 8th Biennial NAB Superannuation FX Hedging Survey involved 46 funds, with $980 billion assets under management (AUM), including industry, corporate and government funds. Self-managed super funds and funds on master trust and other platforms are excluded. Fund responses are based on the investment option with the greatest overall fund balance – in most cases the default fund. The survey interviews took place predominantly in June 2017