Amanda Morrall talks to Morningstar's Chris Douglas about currency risk in KiwiSaver, hedging strategies and historical ups and downs.

Amanda Morrall talks to Morningstar's Chris Douglas about currency risk in KiwiSaver, hedging strategies and historical ups and downs.

By Amanda Morrall

With the Kiwi dollar on the upswing against the greenback once again, KiwiSavers might be wondering what, if any, impact currency fluctuations may have on their retirement savings funds.

Chris Douglas, co-head of research for Morningstar New Zealand, says while the volatility may be nerve wracking for KiwiSavers, it's a risk that most fund managers are provisioning for, through a practice called hedging.

"Fluctuations in currency are a fact of life for every New Zealander whether or not we're travelling or buying on line. We're a small country and our currency does bounce around a lot. People need to be mindful of the currency but I wouldn't say they should be worried about it. They should leave the worrying to the KiwiSaver provider that they are invested with.''

So which funds are most susceptible to currency movements?

Douglas says those with the greatest allocation of "growth" or "aggressive" assets, are at greatest risk chiefly because of their exposure to international equities.(To read more on fund types click here).

"Any growth oriented fund is going to have a larger bias to global assets, so anything with global asset exposure will have more exposure to currency fluctuations.''

To execute the hedging strategy fund managers will generally use derivatives such as forward exchange contracts (FEC's).  An FEC is simply an agreement between two parties to exchange two designated currencies at a specific time in the future.

By using forward contracts (fund managers) can protect the portfolio against a loss in capital value due to currency movements.  Should the currency fall, then the fund manager may make a loss on their hedging contract.

"By using these forward contracts (fund managers) can hedge up that loss in value or part of it, then if the currency falls they have to pay back the hedging loss that comes with.''

The upside of a fall in the currency is that the value of the underlying international assets usually goes up, explains Douglas.  While this may be true in a majority of cases, investors need to be aware that on some occassions they may experience a double-whammy effect where both markets and currency go against them.  Sometimes the double-whammy will work in an investors favour.

"Currency is notoriously difficult to judge or predict. It can fall away or can rise quick in starkly different directions, it doesn't always go against fundamentals. For that reason a lot of KiwiSaver providers will actually have some sort of hedging process in their KiwiSaver schemes to hedge out any risk that comes with it." 

 

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