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Australian supers to target more offshore investments

By Aaron Woolner

02:56, 16 November 2021

A night view of Melbourne's central business district
Superannuation schemes will ramp up their FX hedging, says NAB – Photo: Alamy

Australian superannuation funds are looking to ramp up their offshore investment allocations in the search for yield and diversification. 

The fund managers typically referred to as “supers” are the main retirement savings vehicles in Australia and their assets are expected to reach AUD4.7trn by 2030, according to Deloitte in the research cited by National Australia Bank. 

NAB’s latest Superannuation FX Hedging report says that supers are looking to increase their already substantial overseas holdings, According to the NAB report, funds have on average 46.8% of their assets offshore, an increase of up 41% in 2019.

Share of international assets to rise

“The trend looks set to continue, with 61% of funds saying they will increase the share of international assets in their portfolios in the next two years,” NAB said.

Targeted asset classes include listed equities, unlisted infrastructure and listed property. 

“Alternatives, unlisted property, fixed income, and listed infrastructure also rated mentions,” said the report.

In tandem with this increased focus on offshore investment, NAB said that supers will increase their use of FX hedging given that currency volatility can have a major impact on the realised returns of overseas investments. 


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Funds hedging more

“Overall, Superannuation Funds are hedging more of their international equity exposures than in 2019. Even so, despite the sharp fall that occurred in the AUD (Australian dollar) in early 2020, overall hedge ratios remain relatively low, which we believe reflect the long-held view that running long foreign currency exposure will act as a diversifier during major ‘risk off’ events,” NAB said in its note. 

While there is a generalised trend towards greater overseas investment by supers, NAB said that there was a disparity in opinion in the sector on how to deal with emerging markets in currency risk, particularly with respect to China.

“More than half of Funds (57%) do not hedge any of their EM (emerging markets) exposure, despite increasing allocations to these markets, while of the 43% of Funds who do hedge at least some of their underlying exposure, close to three-quarters hedge 50% or less of their equity risk. In contrast, most Funds with investments in EM fixed income operate with a relatively high currency hedge ratio – typically, 75-100%”, the NAB report said. 

Currency decisions gain importance

The term hedge ratio refers to the percentage of the total investment which has been hedged using forex derivatives. 

“Currency decisions have assumed more importance, as highlighted during the period of extreme currency volatility in 2020, as well as the increased focus of Funds on target currency exposure,” NAB said in its report. 

Read more: Buoyant equity market gives AustralianSuper record returns

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