Andrew Pech, Economist – Portfolio Manager Support
Has the routine volley of media coverage on the Australian dollar’s daily movements ever made you wonder how it will affect you? If you’ve planned an overseas holiday before, you would have learned that it does, and indeed may have even influenced your decision on where to travel. But, have you ever wondered how it affects your super returns?
In short, currency movements have a limited direct impact on your QSuper investment returns. Why is this? It’s because QSuper’s overall risk management strategy is to limit much of the currency risk your super balance is directly exposed to1. This management isn’t only against US dollar movements, of course, but includes the many other currencies QSuper’s assets are denominated in, for example the Swiss franc, Hong Kong dollar, New Zealand dollar, etc. And because foreign currency hedging is done at the whole‑of‑portfolio level, all asset classes (bonds, diversified alternatives, real estate, infrastructure, etc.) are hedged to some extent, not just international equities.
In practice the international shares allocation within our multi-asset class (or Ready Made) investment options (Lifetime, Balanced, Moderate, Aggressive1), holds small exposures to currency movements. On the other hand the single sector QSuper International Shares investment and Diversified Bonds options are fully hedged. To be clear, this means that for these single sector options any gains or losses resulting from currency fluctuations are removed to provide a return on international investments which solely reflects the performance of the underlying foreign investment.
This strategy is underpinned by our investment principles, one of which recognises that foreign currency introduces uncertain returns and risks and, on balance, it is not a rewarding exposure in multi-asset portfolios. We see this as enhancing the probability of our Ready Made investment options achieving their investment objectives rather than detracting from it.
In recent years this foreign currency hedging policy has actually raised investment returns for QSuper. This is because the instruments used to hedge currency exposure are priced on the shorter-dated interest rate differential between Australia and the offshore country’s currency we are hedging. On average, Australia’s shorter-dated interest rates have been higher than seen offshore, enabling us to capture a positive interest rate differential.
Of course, we can only hedge the direct impact from foreign currency exposures. We cannot fully hedge away the total impact that an exchange rate will have on the economy, interest rates, corporate earnings for a sector or economy, etc. If we consider that exchange rates are influencing such factors materially, this can be managed through our Dynamic Asset Allocation (DAA) process. The DAA process is the ability of the QSuper Investments team to move the asset class weights within the approved asset allocation ranges set by the QSuper Board of Trustees1. We can talk in more detail about this process in a future post if it’s of interest.
1 This does not apply to QSuper’s Self Invest option nor to the QSuper Socially Responsible option which is wholly managed by AMP Capital Investors through its Responsible Investment Leaders Balanced Fund.
The views of the author and those who provide the responses to comments posted on this blog are not necessarily the views of QSuper. This information is for general purposes only. It is not intended to constitute advice and persons should seek professional advice before relying on this information.
Past performance is not a reliable indicator of future performance. Each of our investment options has a different objective, risk profile, and asset allocation.
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Economist – Portfolio Manager Support
Andrew is responsible for forecasting the economic outlooks of various economies, monitoring global economic and financial market conditions, and providing support to the portfolio managers.