HEDGE YOUR BETS

We talk a lot about whether investments are primed for growth or what fees need paying. But what do hedges have to do with it? Money editor Susan Edmunds explains.

As a retail investor a whole lot of people have a whole lot more information that you do. Your competitive advantage there is nil. This is one thing you should absolutely leave to your fund manager. SAM STUBBS

Founder of Simplicity

HEDGING

Wh en I was talking to someon et he other day abo ut t heir investment choices, they had one question that did no tc om eu p quite as often. Usually, peopl e ta lk abo ut w heth er t hey are in a growth fund o rac onservative on e, w hether fund managers are investing responsibl ya n dw h at s ort of fees they’re paying.

B utt hi st im e,t he person Iwass peaking to wanted to talk about hedging .S pecificall y,w h at d oes it mean when a n in vestment manager talk s ab o utafu nd being hedged?

Generall yw hen we’re talking about hedging , we are referring to currency hedging.

If y o ubuys omething on the Australian sharemarket, for example, how muc hi t’s worth to yo uw ill depend not only on ho wt h es hare price moves but ho wt he New Zealan dd ollar performs.

If y o ub ough tas hare fo r$5atat im ew hen the New Zealan dd ollar was almost equal to the Australia non e, then sold i tw hen th eNZd ollar dropp ed s ignificantly, you’d be better off eve ni ft h es hare pri ce d idn’t move. B utc onversely, i fy o ub ough tw hen th ed ollar was weak an ds ol dw he ni t was strong ,y ou’d potentially en du p wit hl ess of a return eve ni ft h es hare price impro vedab it.

Fund managers w ho h edg e t h e i r fu n ds d o so, so th at y our investment is only affected by the performance o ft he assets, no tt h ed ollar.

The hedging is generall yd on ew ith af orward curren cyc ontract that offsets the currency movements.

Sam Stubbs, founder o fS implicity, sai dt he averag e fu n dw it hin ternational assets woul d be about 65% hedged back to the New Zealan dd ollar.

“The best way to think abo ut w heth erIs hould hedge or not i s ‘w here am I going to spen dt he money?’ On ce I g et t he mon eya n d I’ m going to spend it in New Zealan dt here’s an advantag e to being hedged versus the New Zealan dd ollar.

If y ou’re spending overseas, wh yw oul dy ou bother making sure it’s all in New Zealand dollars unless you have a strong vi ew t hat the New Zealan dd ollar is going t o go stronger over the years?”

He sai da nother aspect to consider was what investo rs w oul d be paid in each currency.

“Imagin ea ll that money i ss itting in a ba nk earning interest – i ft he New Zealand interest rates are high ert ha n Am erican the nh edging back to the New Zealan dd ollar migh tbea really good idea. But i ft he interest rates in the US are higher, you’re forgoing gain by s itting on the New Zealan dd ollar.”

He said hedging woul dre mo ves ome o ft he volatili tyt h atc ould be created by currency markets.

But h e sa id i twass omething that was best l eftto fund managers to worry about. “As a retail investo ra whole lot of people h aveaw hole lot more information th at y o ud o .Y o ur c ompetitive advantag et here is nil.

This is on et hing yo us hould absolutely leave to your fund manager.”

Gre gB unkall, data directo ratM orningstar, agreed. “Mo stK iwiSaver providers adop t ac onservative hedging strateg y,w ith approximate l y 50% o ft heir riskier international assets hedged, whil et heir fixed income assets are fully hedged. However, some providers may adjust their currency exposures over time, leading t og reater short-term variations in the returns o fK iwiSaver funds. In the long run ,t hese variation ste n dt o eve no ut. Whil eu nderstanding the hedging strateg yca n shed light on return variations among providers, it is generally advisabl ef o rt he average investo rt o focus on selecting th ea ppropriate fun da n dc ontributing regularl yf or long-term success.”