Super fund weighs up ‘forex’ risks

The NZ Superannuation Fund is considering ending its policy of hedging almost all of its foreign investments in New Zealand dollars.

A change could expose a meaningful portion of the $43 billion fund to foreign currency movements and more volatility in the local value of the fund, which could bounce around by billions as the dollar rose or fell.

Most of NZ Super’s investments are comprised of passive investments in foreign companies and overseas bonds, many denominated in United States dollars. At the end of June, only

15 per cent of the fund’s money was invested in New Zealand, with 47 per cent of its investments – or just over

$20b – committed in North America and 17 per cent invested in Europe.

The fund hedges those foreign investments, so it is shielded against shorter-term changes in the value of the NZ dollar. However, in what could be a significant change, the fund is considering altering its approach so the value of at least some of its passive foreign investments would rise if the New Zealand dollar fell, and go down if the Kiwi gained ground.

Deciding whether to hedge investments against currency movements is a common quandary for many investors, including individuals who may be concerned about the value of their savings if they choose to retire or move overseas.

Irish insurance broker and risk manager Willis Towers Watson, appointed by the Treasury to review NZ Super’s investment approach, suggested in July that it might now be time for a change – in part because of the growing size of the fund.