Aussie funds shun currency overlay

Australian superannuation funds’ use of currency overlay has declined, according to a report made public last week.

National Australia Bank’s (NAB) survey of Australian superannuation funds’ approach to FX exposure found the number of currency overlay users has fallen by more than 50% in recent years. According to Donald Hellyer, director, financial institutions at NAB in Sydney, the decline is because Australian funds have not been convinced of the benefits of overlay.

"There are large doubts on currency overlay managers’ abilities to gain additional returns (alpha)," Hellyer told RiskNews' sister publication FX Week. "Superfunds know there are large movements in FX rates and some are still tempted to 'have a go' at capturing returns, but they need to see real proof that this is possible from an Australian currency base."

Part of the problem facing currency overlay providers in Australia, said Hellyer, is that many global firms entered the market at a time when it was difficult to generate profits. "They started when the Australian dollar was very volatile and in a downward motion," he said. "As many of the benchmarks were 0% hedged it was an extremely difficult time to try to make money."

At present 30% of the funds polled for the survey are using active currency overlay management, compared with over 60% that have used overlay in the past.

The lack of benchmark hedging among Australian superannuation funds was expected to rise when the Australian dollar rose in early 2002, which raised fears of a panic rush in Aussie buying, the survey said. But this failed to materialise, as the majority of the respondents polled in the survey were at or above the benchmark in their currency programmes. Nearly 70% of those polled said a change in spot currency value would not lead to a change in the benchmark for their international exposure.

NAB, in conjunction with Bank of New Zealand, conducted the survey - which polled 26 of Australia’s largest government, corporate and industry superannuation funds over a two-year period. Those polled, NAB said, represent about 40% of total Australian funds under management. The next survey, in two years' time, will focus on wholesale funds.