NZ fund managers and asset owners will likely increase exposure to offshore assets over the next couple of years from an already high base, according to the latest BNZ FX Hedging Report.
Released last week, the 11th biennial BNZ survey of the local investment industry found almost 40 per cent of respondent planned to allocate more offshore compared to 22 per cent in the 2021 poll.
The increasing appetite for international assets covers both bonds and equities.
“Just one fund in our survey indicated they’d look to decrease their exposure to international assets,” the BNZ study says. “Those looking to increase international asset allocation mainly cited the diversification and breadth of investment opportunities offshore, the limitations on the size and breadth of opportunities domestically and the potential for additional returns that international assets might offer.”
On average NZ institutional investors held about 60 per cent of assets overseas in 2023 compared to just 48 per cent for the Australian superannuation industry, which manages over A$3.5 trillion.
However, the BNZ survey found some variation in international exposure between investor categories: charitable trusts, superannuation funds and KiwiSaver schemes allocated between 59-64 per cent offshore compared to 46 per cent for fund managers.
While super funds, KiwiSaver providers and charities all either increased or held steady their international asset allocations compared to 2021, fund managers reduced exposure.
Since the 2019 BNZ report, KiwiSaver schemes have lifted aggregate holdings of offshore assets from 52 per cent to about 60 per cent over the following two surveys.
Given the large exposure to international assets, most respondents rated hedging as either important (58 per cent) or ‘marginally important’ (37 per cent).
Nonetheless, an increasing proportion of NZ institutional investors prefer a hands-off approach to managing currency risk.
“Most funds describe the management of their currency hedging as passive (64%) rather than active,” the report says. “This is an increase from the 58% in the previous survey who described their hedging as passive. The main reasons for being passive on hedging management were that they didn’t believe active management enhanced returns or that active management didn’t fit with the total fund strategy.”
About 70 per cent of respondents use external managers to implement their currency strategies.
During the two-year period since the last survey, BNZ found the average hedge ratio was more-or-less level at 65 per cent with the biggest category change seeing fund managers boost hedging from 53 per cent in 2021 to 73 per cent in the latest poll.
Global equities hedge levels, which tend to be more volatile than fixed income, rose a little to 53 per cent in 2023 from 50 per cent two years prior but the figure is “still well down from the 61-65% levels of four to six years ago”, the report says.
As per previous studies in the series, investment committees remain the most influential in setting currency hedges, despite a slight drop in to 56 per cent in 2023 from 62 per cent two years prior: about a third of respondents named consultants as the most influential in hedging decisions, up from 28 per cent in 2021. Just 3 per cent of those surveyed said trustees or fund managers held sway over their hedge calls.
Produced by BNZ’s Craig Cooper, head of currency overlay and FX investor sales, and Philippa Fourbet, general manager markets, the well-regarded survey tapped 67 institutional investors for the 2023 version with a combined assets under management of almost $170 million, or about two-thirds of the total estimated ex-government fund market of $268 billion.