Risk survey highlights Trans-Tasman differences
Trans-Tasman differences highlighted in risk management survey
Key differences in the ways New Zealand and Australia manage currency risk have been identified in a recently completed survey*.
Bank of New Zealand and its owner, National Australia Bank conducted the comprehensive survey into how superannuation funds manage risk.
Foreign Exchange Manager for Bank of New Zealand, Greg Ball says the most notable difference is that New Zealand funds limit the pain of an appreciating currency by lifting their hedge benchmarks.
“This is quite unlike in Australia, where superannuation funds both increased and decreased their international equity hedge benchmarks.”
This was particularly the case with the appreciation of the New Zealand dollar from an all time low of US$0.3902 in November 2000 to a multi year high of US$0.7467 in March 2005. During this period, equity hedge benchmarks in New Zealand increased to an average of 40 percent.
The survey also found that Investment Committee was the most influential group in setting the currency benchmark in Australia and New Zealand, says Ball.
“Interestingly, Australia is now following the New Zealand model in this regard. When this survey was completed in 2002, Australian consultants dominated the currency benchmark decision-making.
“Also, in Australia, nearly 80 percent of superannuation funds use active or passive currency overlay programmes that are overseen by specialist managers. In New Zealand, by contrast, only 21 percent of superannuation funds use external managers, and only 11 percent use external managers for active currency overlay programmes.”
Other finds include the fact that the default 50 percent hedge benchmark for international equities - (funds that will benefit half the time from any movement in the currency) – is the most popular in New Zealand.
“In Australia, on the other hand, there is no consensus amongst superannuation funds as to the optimal hedge benchmark. The survey highlighted a wide variety of hedge benchmarks in Australia.”
The table above shows that funds in New Zealand still have a wide variety of hedge benchmarks for their international equities. However, over time and with the increasing value of the New Zealand dollar they have elected to hedge more, moving steadily up from 19 percent in 2000 to 37 percent in 2002 and 42 percent in 2005.
*survey was of 19 large funds from a variety of sectors, including superannuation funds, government funds and retail and wholesale asset managers.