Australian Funds Building Offshore Investment; Using FX Forwards

New thematic research from NAB finds that Australian superannuation funds are increasing their offshore exposures – a move that was flagged up in the bank’s latest FX Superannuation Survey and are predominantly using FX forwards for hedging purposes.

NAB undertook a detailed analysis of a large sample of the portfolio holdings data from 14 of Australia’s largest Super funds. The data has been made available, in highly granular form, for the first time in 2022 under new regulations.

The bank’s analysis covers Portfolio Holdings Disclosure (PHD) data as of 30 June 2022, the most recently available under the half-yearly reporting requirement. PHD data must be published within 90 days of the relevant half-year end date, and the bank says it will be analysed on an ongoing basis to help quantify key industry trends.

Against the backdrop of a Superannuation industry whose managed savings pool is forecast to double to AUD 6 trillion by 2030, the PHD data provides, NAB says, “a timely opportunity to assess the state of play of the industry in relation to current asset allocations, in the knowledge they will almost inevitably change as the size of the savings pool expands during the industry’s current accumulation phase and as contribution rates further increase”.

It adds the study aims to give superannuation fund investment teams, trustees and ultimately members greater insights into the breadth of investment strategies, country exposures and derivatives hedging being used to protect returns in volatile markets.

On a broad level the analysis finds that Australian funds are well-diversified and have on average 46% of listed funds invested domestically. The listed emerging markets exposure represents just over 5% of the overall listed assets exposure, with a heavy bias to Asia. At the international listed assets level, less than 10% are invested in emerging markets.

The 46/54% domestic/international asset allocation for listed assets (equities, property, infrastructure and alternative) revealed in the study compares to a 53/47% domestic/international split in the NAB Superannuation 2021 FX Hedging Survey.

“This suggests either that the 14 large funds surveyed have higher international allocations relative to smaller peers or that the trend toward greater internationalisation of portfolios as the growth of Funds Under Management continues to expand faster than domestic GDP, is proceeding apace,” NAB says. “We suspect the truth is ‘a bit of both’.”

With increased offshore investing comes, naturally, more hedging requirements for those funds that actively manage such exposures, and the survey finds that funds use a range of derivatives to mitigate risks or manage exposures, including FX and interest rate swaps, as well as futures and options, however FX forwards are by far the preferred instruments for hedging underlying foreign currency risk back to Australia.

NAB says that while there are some ambiguities and question marks concerning consistency across individual fund reporting, taken at face value the impact of FX forwards (and other currency related derivatives) was to increase exposure to the Australian dollar, and hence reduce exposure to foreign currencies, by on average 25% (within range of 30% to 0% – the latter meaning Funds who don’t hedge any currency exposure).

It adds that 68% of the total 25% increase in AUD exposure is against the USD, unsurprisingly with 61% of offshore assets denominated in US dollars. Almost all the remainder relates to non-USD developed market currencies, with emerging market exposures not materially hedged by the use of derivatives, in so far as they are typically either left unhedged or proxied by developed market currencies.

Across all derivatives, NAB says there was a mark-to-market loss amongst the 14 Funds amounting to just 1.1% of the underlying value of the My Super-type portfolios.