Dutch Disease hitting super returns

Exporters and import competing businesses are both suffering at the moment under the weight of the Aussie’s massive rise since the beginning of QE2.

But this got me thinking about our collective superannuation and where it is invested.

All Australians contribute to superannuation and while some manage their own, for the most part super is allocated to what’s known as “balanced” portfolios. This means that your super will have some cash, fixed income, international fixed income, property, Australian shares and international shares.  It is the international component of these portfolio’s that got me thinking.

Below is a chart of the S&P 500 in the US, the ASX200 here in Australia and an on ETF listed on the ASX which allows for an investment into US shares but, crucially, unhedged for currency movements. While we see that the ASX200 has lagged the S&P’s returns since the low in March 2009 the ETF has had a severe AUD handbrake applied. It’s not in negative territory but neither has it had a spectacular return, relative to the other measures here, underperforming badly.

The message here is not to panic but equally when the super returns come through the door keep a close eye on your returns and asset allocation. It would be easy to think that the surging US markets would be more than enough to make up for the poor performance at home. However if the US exposure is un-hedged then the soaring AUD will be eating away at those returns.

An un-hedged exposure to the S&P500 is up roughly 15% from the March 2009 low against the actually performance of the S&P500 which is up more than 100%. Meanwhile the ASX200 is only up 55%.

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  1. As Advisers we have been saying this to clients for near on a decade.

    Still the big providers continue with their standard unhedged Int’l exposures; and they of course will be the beneficiaries of Shorten’s vision.

  2. Ah, the age old question of whether to (currency) hedge international investments. Something I’d consider with the AUD at 0.50 USD – not something I’d touch with the AUD at 1.09 USD.

    • Vanguard (who I use for my diversified index funds) hedge international fixed interest, property securities, small companies but not shares or emerging markets shares.

  3. How has the ASX200 performed in US dollar terms since the March 2009 low?

    Indeed, how did Australian property perform over the course of 2009 in US dollar terms? That should be quite spectacular!

  4. International exposure within super funds is generally about 50% hedged, although there has been a trend recently amongst some of the larger funds to more actively manage this…

    A lot of funds also offer both a Hedged and Unhedged International equity option under their investment menu, so this is one area where you can switch between yourself.

    What I find more interesting however is the country exposure within each fund. The ‘International exposure’ within the balanced options are, I believe, still heavily weighted to the US, Europe and Japan, with only a few having an ‘Emerging Markets’ option for investors to select. Questions about the sustainability of Chinese growth over the next few years aside, I’d still like the option to hold a higher proportion of super assets in emerging markets for the long term.

    • Good point Leo, there aren’t many emerging market options to choose from, and I was always careful to select “Asia-ex Japan”.

      Superannuation allocation in “balanced” is shockingly bad – it should be well over 50% to bonds and fixed interest, and less than 40% in equities, of that, less than half in Aussie (20% total)

      • “Superannuation allocation in “balanced” is shockingly bad – it should be well over 50% to bonds and fixed interest, and less than 40% in equities, of that, less than half in Aussie (20% total)”

        On what basis do you make that claim? It appears awfully general.

        I can’t see how in the present fiat currency environment that this would be at all suited the to the superannuation objectives of a 25-30 year old person.

      • Rusty, in the context of “balanced” I make that claim, not the current asset allocation (i.e tactical) of a typical superannuant.

        I contend that the risk profiles used by the FP industry (and hence sold to super funds) are completely wrong. The so-called balanced option is actually high risk. High risk is actually SUPREMO risk.

        A 25-30 year old Australian in the current environment should not have more than 20-40% of their super in Australian equities.

        The Australian share market, contrary to the industry spruikers DOES NOT get you 8 or even 6% returns year in year out.

        I’ll be exploring all this in a future post about the trouble with superannuation and how its asset allocation that is the main trouble, not fees (which is endemic to fund management, not their asset allocation per se).

        • Completely agree with the “Asia-EX-JAPAN” investment option Prince. Looking forward to reading your post on asset allocations.

          I work in the super industry myself, and was surprised when I started a few years ago and found that the typical fund’s ‘Balanced’ option was 60-75% ‘growth’ assets, and something like 55% equities overall focused in Australia, US, Europe and Japan.

          Its also interesting reading some stuff from global pension funds, endowment funds and charities – driven perhaps by the DB environment, these funds look much more sophisticated than our own, especially when it comes to asset allocations, risk exposures and investing in alternatives (all of which are linked). See University of Texas’ endowment fund (not a ‘super’ fund of course, but similar in terms of size and risk profile) not only investing in gold, but taking physical delivery of their investment recently. Again, regardless of what your opinion of gold is, I don’t see any Australian super fund thinking of a strategy like that any time soon.

  5. One asset class goes down, another goes up. Believing that you can identify these things in advance is a fool’s errand. It’s best to simply buy when things look cheap.

    To put it another way: if the international shares in a balanced fund underform, the fund will rebalance by adding to that asset class. I.e., if the AUD goes up, they’ll buy more international shares. The reverse also applies. In my opinion, this is exactly what they should do. That’s the advantage of balanced funds.

    And those “disengaged” super fund members actually have the right idea. It’s better to ignore your fund rather than chase last month’s top performer. That’s a waste of time and will only cost you in the end.

  6. Perhaps this issue here is that a good deal of market participants view the issue of currency hedging in the wrong light. The decision to invest in equity markets exposed to currency fluctuations is not a decision of equity market or investment vehicle selection its one of “asset allocation” or more specifically it’s a risk allocation decision. Electing to hold unhedged (currency) equity positions is an active decision to add currency risks to a portfolio, yet industry wide it is still seen as basically a side issue??
    Most of the studies I have seen suggest that currency fluctuations account for upwards of 60-70% of total international equity returns over longer holding periods, now if your “growth” portfolio has a 40% exposure to intl equities that’s one hell of a portfolio risk that’s not properly accounted for!! (add this together with the plethora of other portfolio construction issues surrounding the traditional “strategic asset allocation” approach and it’s no wonder the absolute returns of the average investor’s portfolios are so poor!)
    This issue is really just an extension (if not perfect example) of the issues in the traditional investment models. I find that those guilty of not understanding the currency risk issues are the same practioners that fail to grasp true diversification concepts, take a look at your average “high growth” fund sold by the wealth industry in this country (if not worldwide). 99% of the promoters for these products would have you believe that because you own 1000 different equity securities across the globe that you are “diversified”…… WRONG, you have diversified 1,2 or maybe 3 kinds of portfolio risks, but at the end of the day the entire risk/return profile of your portfolio is dictated by EQUITY RISK alone, and yet people will argue against this till they are blue in the face?? go figure!
    Others have mentioned on this post that our asset allocations seem far more basic than similar funds overseas. Well you are correct. Take a look at the Australian wealth management industry as a whole and the success or failure of our retirement system is pretty straight forward to forecast today. EQUITY RETURNS, if equity markets fail to perform over the next 20 years then so will the portfolios of the vast majority of Australia’s superannuation members, walk into any major financial planning practice in the country, look at their model portfolios and standardized asset allocations and come back to me if the overwhelming risk exposure is anything other than equity markets.
    Sorry Phil H, perhaps I’m misreading your comment but apart from reading like the financial planners salesmenship book 101, your statements are somewhat contradictory. I agree with you that active asset allocation for the majority of investors (and fund managers) is a fools errand for a combination of reasons, I would also loosely agree that maintaining a fairly conservative portfolio and investing capital when valuations are compelling would also serve most investors well, however this has nothing to do with your average balanced fund?? By their very nature most balance funds have no concept or interest in “value” they are setup to hold “static” sorry “strategic” combinations of assets, and most are arbitrarily re allocated based solely on the price not value movements of one asset vs another. In simple terms their motto is to investing in everything you can at any price. Problem is that most funds are primarily driven by equity risk alone and once again, if equity markets fail to perform then your average balanced fund is going to provide very little in the way of absolute returns for investors (with countless rebalancing studies showing that most rebalancing strategies add at best 1-2% pa in return before fees and depending on specific market cycles). So the diversification of security and equity market specific risk, with the addition of bond market risk and an overall of rebalancing are basically the only risk management tools a balanced fund (or 99% of all super funds) have to offer…. no wonder the govt is panicking about the ability of Australians to self fund their retirement!