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KiwiSaver and our changing dollar?

 

Q.        It seems to me that movements in the NZ dollar can often have a bigger impact on investment returns than movements in the prices of shares and bonds offshore.  How do KiwiSaver providers manage this currency risk?  Are they required to disclose gains and losses from currency?

 

A.         You are quite right about the impact of currency movements on overseas investments.  Over the 4 years from May 2009 the NZ dollar went from 55c to 85c against the US dollar.  If you bought US shares for say US$1000 back in May 2009 it would have cost you NZ$1818 but if you’d waited until May 2013 it would have cost only $1176 – saving yourself $642.   Of course you may have bought back in 2009 hoping that the value of the shares would increase well in excess of any currency losses, but you would still have given away a large proportion of your gains over that 4 year period.

 

Currency can work in an investor’s favour if you buy offshore when the NZ dollar is strong and sell when it weakens, achieving a return which is often considerably better than the performance of the underlying shares.  When it comes to KiwiSaver, however, investment managers can’t wait for that to happen – their mandate is to diversify and that will usually involve investing overseas in currencies other than NZ dollars.  There will be a few managers who ride the ups and downs of currency, and you will hear them justify their position by saying ‘You haven’t lost unless you cash up now’ - pointing out that the NZ dollar is a relatively minor and higher risk currency compared to say US dollars or sterling.  However, most fund managers adopt a more prudent strategy which is to have some or most of their KiwiSaver funds hedged back to the New Zealand dollar.

 

I asked our largest KiwiSaver provider, ANZ Wealth, about their currency strategy.  The company currently manages $3.8 billion through the OnePath Default, SIL and ANZ schemes.  Graham Ansell, GM Investment Management, said “All our offshore bonds and listed property investments are 100% hedged back to the NZ dollar. These bonds and listed property investments are principally purchased for their income. As we do not want currency movements to impact negatively on returns, we choose to fully hedge this exposure.  Global shares - the more ‘risky’ part of any portfolio - are typically 65% hedged which allows for some currency gains and losses.  At ANZ we build a plan and stick to it.  The worst thing you can do with currency hedging is to frequently change your approach.”

 

Hedging 100% back to NZ dollars is often the preferred option for lower risk portfolios to reduce volatility.  This strategy is not without risk though, as our currency could be massively devalued for example in (heaven forbid) an outbreak of foot and mouth disease.  In that instance, unhedged overseas investments will protect some of the value of your KiwiSaver nest egg.

 

Do managers declare currency gains and losses?  Yes they do, as all KiwiSaver funds are valued daily in New Zealand dollars, and that valuation will include the impact of currency movements on the value of the underlying investments. 

 

If you want to find out how your KiwiSaver fund deals with overseas currency, read the investment statement.  Hedging (or not) is an important part of their investment strategy.