By Tom Westbrook and Stella Qiu
SINGAPORE/SYDNEY (Reuters) -Funds in Australia’s A$4.2 trillion ($2.7 trillion) pension sector are rethinking some of their long-held strategies of buying U.S. assets and the dollar, as confidence in American growth wanes.
Volatility around Sino-U.S. trade tensions this year has forced investors to reassess their U.S. exposure and the role of the dollar, which has lately failed to behave as a safe haven currency amid heightened uncertainty around Washington’s economic policy.
While there have not yet been any major shifts in strategy, currency dealing desks in Australia have noticed modest changes in hedging demand from some pension funds.
Those hedging tweaks are under the spotlight globally and Australia’s pension funds, known locally as superannuation funds, have long kept low FX hedging ratios on large and growing foreign stock portfolios.
When U.S. equities fell, funds allowed hedging ratios to rise by not keeping their currency positions exactly in step with asset prices, said Troy Fraser, head of foreign exchange sales for Australia and New Zealand at Citi in Sydney.
“You would expect the funds to be selling Aussie and buying U.S. to adjust or to rebalance their hedge ratio,” he said.
“We’ve seen a little bit of that, but not a lot. I think funds are generally happy to be longer Aussie.”
Fraser said funds were weighing their asset mix, hedging costs and the outright level of the Aussie.
Were it to extend it could move the currency, and in separate research Citi in February estimated that a 5% shift in hedging now could push the Australian dollar as much as 11% higher against the greenback.
At about $0.64, it’s been falling on the dollar for nearly 15 years since touching $1.10 in 2011.
Along with a tendency to drop reliably whenever global stocks fell, cushioning losses in Aussie dollar terms, the Aussie’s behaviour encouraged a low hedging ratio. Industry-wide hedging on foreign equities was roughly 22% in the December quarter, according to the most recent regulatory data.
“Unhedged has worked,” said Ben McCaw, a senior portfolio manager at MLC Asset Management.
“It was lowering the volatility of the portfolio (and) providing a positive return to the portfolio … so that was almost the ultimate asset,” he said.
Now, however, long- and short-term factors are starting to shift how the Australian currency trades. He has been reducing U.S. dollar currency exposure for about three years.
Others are keeping a watching brief. CBUS, which manages more than A$100 billion, has kept currency exposure steady but the U.S. dollar, which fell through market turbulence in April, caught the attention of fund CIO Leigh Gavin.
