Investing overseas creates currency risk
We seek investment opportunities across the globe. International assets are priced and transacted upon in a different currency to the Australian Dollar. The strength of the Australian Dollar in the global currency market impacts the value of our overseas investments. So, if you choose an option that contains international assets, your super may be exposed to fluctuations in the value of the Australian Dollar. This is currency risk.
The relationship between the strength of Australian Dollar and the impact to your returns is inverse: a weakening Australian dollar will enhance returns and a stronger Australian dollar will diminish returns. This means that currency fluctuations have the potential to result in both positive and negative financial outcomes when it comes to your super.
How we manage currency risk
At UniSuper, currency is not considered an asset class in its own right. This means that we don’t actively trade currencies for the purpose of speculating whether they will gain or lose value. Instead, currency risk is simply a consequence of us investing in offshore assets.
We manage your currency risk through hedging. The aim of hedging currency risk is to reduce the overall impact of fluctuations in the value of the Australian Dollar on your super. Hedging can reduce potential losses caused by a stronger Australian Dollar, as well as reduce potential gains caused by a weaker Australian Dollar.
The proportion of currency risk that is hedged is called the hedge ratio. When determining an appropriate hedge ratio, we consider various factors including:
- the expected volatility of the underlying asset class
- the liquidity of the currency being hedged
- the level of the currency relative to historical trading ranges.
Our hedging strategies
| Asset class | Hedging strategy |
|---|---|
|
Listed equities (Developed markets), including Global property trusts |
Variable We may adjust the hedge ratio between 0% and 100% for each foreign currency.
|
|
Listed equities (Emerging markets) |
Fixed 0% hedged |
|
Fixed interest (Developed markets) |
Fixed 100% hedged |
|
Fixed interest (Emerging markets) |
Variable We may adjust the hedge ratio between 0% and 100% for each foreign currency. |
| Unlisted assets (Infrastructure, Private Equity & Property) | Fixed 100% hedged |
Currency risk and our investment options
Hedge ratios differ across investment options. This is because each option has different allocations to asset classes that influence the mix of foreign currency exposures being hedged. For example, the hedge ratio for developed market fixed interest assets is 100%, but the hedge ratio for developed market listed equities may be between 0-100%. This means that options with a larger allocation to developed market fixed interest relative to listed equities would have a higher hedge ratio (and subsequently be less exposed to currency risk).
Many factors influence the hedge ratio for our options. Some of these factors are within our control (such as asset allocation, portfolio selection and hedging strategy) and some are outside our control (such as market movements in asset prices and foreign exchange). The combination of all of these factors results in a hedge ratio that is continually fluctuating, which is the main reason we do not publish a ratio at any given point in time.