NZ investors have eased-off hedging ratios for global equities over the last two years despite expecting the Kiwi dollar to rise, according to the latest BNZ survey of fund foreign exchange practices.
The 2021 BNZ FX Hedging Survey – the 10th in the biennial series – found the average currency hedge ratio for international share exposures of NZ investors dropped “to 50% in this survey, down from 61% two years ago”.
“A fall was evident for all fund types, with KiwiSaver providers at 54%, Superannuation schemes at 52%, Charitable Trusts at 47% and Fund Managers at 42%,” the BNZ report says.
The average hedge ratio across all offshore assets covered in the survey fell from 71 per cent in 2019 to 64 per cent at the latest count led by fund managers and superannuation schemes. NZ fund managers cut total currency hedging to 53 per cent on average compared to 71 per cent in 2019 while the respective super scheme metric fell from 83 per cent to 71 per cent this year.
“With the NZ dollar about 7% stronger since the 2019 survey, the reduction in the hedge ratio would be consistent with a view that the NZD could weaken, adding to the appeal of unhedged international assets,” the study says.
“However, more respondents thought that the NZD would appreciate than depreciate over the next year and over the next two years.”
The muted enthusiasm for hedging global risk assets coincided with a dramatic fall in the ‘forward points’ yield pick-up for NZ investors over the last two years. While the BNZ survey notes that the ‘carry’ yield has turned upwards a little recently in line with Reserve Bank of NZ rate hikes, the historical hedging performance boost for local investors has been close to zero since 2019 compared to the 21-year average of about 2.5 per cent.
From 2000 to about 2016 the hedging carry yield ranged from 1 per cent to almost 6 per cent (at the height of the global financial crisis) before trending sharply downwards to the current near-zero level.
As expected, NZ investors continue to fully hedge global fixed income assets while the average ratio for offshore property, infrastructure and alternative assets flits between 80 to 90 per cent, the BNZ survey shows.
For the first time, too, the study probed respondents on their Australian dollar hedging habits, revealing divergent practices among investor types.
“The results show that 51% do indeed have a specific target, and the average of those was 62%, materially higher than the 50% for international equities. KiwiSaver (70%) and Fund Managers (67%) hedge more of their Australian exposure than Superannuation Schemes (43%) or Charitable Trusts (50%),” the report says.
Overall, the survey found some significant FX management differences between Australian and NZ investors: BNZ parent, the National Australia Bank, runs a similar hedging survey over the same time periods.
For example, NZ investors report an average exposure of almost 60 per cent to offshore assets compared to 47 per cent for Australian super funds (by far the largest investment sector across the ditch).
The survey also found NZ investors are less likely than their trans-Tasman counterparts to insist on electronic execution services from FX hedge providers or implement currency overlay strategies via third-parties.
“In Australia, it’s widely thought that it’s more efficient and transparent to invest in unhedged offshore assets and use a specialist to implement currency hedging separately. In New Zealand it remains common for funds to invest in ‘hedged to NZ’ assets where the currency risk is managed by the underlying fund manager,” the BNZ report says.
“… regulation is having a bigger impact on currency management in Australia. This is another reason why Australian funds elect for the separation and transparency that outsourcing their hedging needs provides.”
But the survey found the proportion of NZ investors using external providers (mostly fund managers) to execute FX strategies almost doubled to 75 per cent against 40 per cent in 2019.
As well, the report says NZ investors tend to follow a passive approach to currency management – rarely moving ratios – while also favouring short-term hedges of one to three months.
The survey – fronted by BNZ head of FX investor sales, Craig Cooper, and head of markets, Philippa Fourbet – covers KiwiSaver providers, fund managers, charitable trusts and other large investors with combined assets under management of almost $180 billion, or about 70 per cent of the estimated total NZ fund market (excluding government-owned entities) of $248 billion.