By Scott Murdoch
SYDNEY, Feb 9 (Reuters) – A major Australian pension fund has been increasing the hedging of its international equities portfolio, saying the Australian dollar has been undervalued as the country’s central bank starts to tighten rates while most major economies keep rates on hold or prepare to cut.
Jeff Brunton, the head of portfolio management at HESTA, which has A$100 billion ($70.15 billion) in funds under management, said the fund has been boosting its holdings of the Australian dollar.
“We’re long-term investors and we are quite valuation driven and our long-run valuation models for the Australian dollar have been suggesting for quite a while now that it has been undervalued,” Brunton told Reuters in a phone interview.
“If we’re holding international equities and the Australian dollar is rising, the value in Australian dollars and those international equities would be falling. But the hedge protects the portfolio in that environment. And we’ve had more Australian dollars and less foreign currency compared to our long-term settings.”
Most Australian pension fund investors in U.S. equities would have very little currency hedging because the dollar was expected to rise on negative shocks.
HESTA is the second major fund to increase its international equity hedging recently, with Australia’s second-largest fund Australian Retirement Trust saying it has lifted its hedging strategy lately.
Increasing Australian dollar buying to hedge international equities portfolios by pension funds could put upward pressure on the currency, according to analysts.
The Australian dollar rose 4.3% last month to hit its highest in three years, and it is up almost another 1% in February.
The Reserve Bank of Australia last week raised the official cash rate by 25 basis points to 3.85%, making it one of the few global central banks to be increasing rates at a time when most others are either cutting rates or keeping them on hold.
HESTA holds A$23.45 billion worth of international shares, according to the fund’s figures.
“We’ve been underweight foreign currency versus our long-term plan. And we think we’ve probably been underweight relative to how our peers would be managing foreign currency,” Brunton said.
Investors have been watching and waiting for the Australian dollar to rise for years. The trade surplus is widening as commodity prices have climbed. Benchmark 10-year government bond yields are the highest in the G10 and at the three-year tenor, the yield advantage over the U.S. is its widest in nearly a decade.
Late last month, speculative positions flipped from a small net short to a net long bet on the Aussie.
($1 = 1.4255 Australian dollars)
(Reporting by Scott Murdoch in Sydney, additional reporting Tom Westbrook in Singapore; Editing by Lincoln Feast.)
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