Reducing hedging boosts returns

The New Zealand dollar fell from US76c to US71c over May, at the same time as global equity markets rose.

AMP, Pathfinder and OneAnswer all reported 6% to 8% increases in their global share funds in the month. Fund managers who maintain a fully currency hedged position rose only up to 2% over the same period.

Over May, $100 invested in Nikko’s Global Equity Fund would have become $101.08, according to Fundsource data. But in its unhedged fund, it would have only turned into $107.90.

John Berry, of Pathfinder, said reducing currency hedging, particularly against the USD, was essential for fund managers in the face of a falling dollar.

“We started the year with an average 60% hedge, reducing to 40% in March and to 27% now.   It is widely believed that the NZ dollar could fall further against the US dollar.  It is anybody's guess the time frame it will happen in and how far it will go - but the risks point to a weaker kiwi dollar.”

But Mint chief executive Rebecca Thomas said her firm would fully hedge its offshore exposure. “ We retain discretion to vary this but our view is this is a rare occurrence as our skill is in stock picking not picking currencies so we want to protect NZD returns for our local investors."

She said a full hedge made it harder to make money for investors when the dollar was falling but currency was only part of the story as returns were also improving in some offshore markets relative to NZ projected returns.

Fisher Funds chief investment officer Mark Brighouse agreed currency was only one factor in its analysis. “Developed market equities are typically hedged at 50% or less. Emerging market equities tend to have very little hedging or may have some proxy hedging (which means hedging the currencies that have a strong US dollar linkage with some degree of US dollar hedges).”