Super funds strategising to manage currency risk: NAB

Managing currency risk needs new approaches in a funds management environment characterised by perpetual policy changes, pressure to grow, and increasing transaction costs, according to the National Australia Bank (NAB) 2017 Superannuation FX Hedging Survey.

Regulation was the most significant factor touted in NAB’s annual hedging survey, with 30 per cent of fund respondents stating they had already upped the focus on margining and collateral.

The rise in emerging market exposure along with the drop in emerging market currency hedging had been responsible for positive fund sentiment toward changing up management strategies, according to the survey, and 70 per cent of funds had indicated consideration or implementation of transaction cost analysis to manage rising costs; three quarters of those (76 per cent) had looked to a manager of bank to provide the service.

Commenting on the findings of the survey, NAB director of fixed income currencies and commodities, Emma Lawson said funds were feeling the heat when it came to best practice management of Australians’ wealth.

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“The environment in which funds operate is evolving quickly, incorporating more regulation, policy changes, pressure to grow and diversify, and technological change,” she 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 also found most funds used an external overlay manager to implement trades, or hedges, to protect investments against the associated risks of currency exposures, with only nine per cent planning to outsource in the future.

Attention was also drawn to the importance of following Australian Securities and Investments Commission (ASIC) guidelines in the survey, which encouraged funds to seek advice from a bank or asset manager.