Aussie Superannuation Fund Counters Scrutiny Over Millions in Losses From Currency Hedging

The A$5.8 billion MTAA Super fund is being investigated by the Australian Prudential Regulation Authority (APRA) over its response to the global financial crisis.

(June 8, 2011) — The A$5.8 billion MTAA Super is being investigated by the Australian Prudential Regulation Authority (APRA) for removing its currency hedges in the midst of the global financial crisis, the Australian press is reporting.

There has been huge volatility in the Australian dollar vis-à-vis the American dollar, contributing to a reported A$500 million in losses by the MTAA superannuation fund for the removal of its currency hedges during the financial crisis. However, following the claims, MTAA Super defended its practice of currency hedging, noting that it did not suffer $500 million in losses from removing currency hedges. “The fund was hedged during the financial crisis and as a result, when the Australian dollar plummeted, it — like all funds that were similarly hedged — paid for the hedge contracts that matured during that time,” MTAA Super Chief Executive Michael Delaney told The Australian. MTAA Super added that currency risk is a risk faced by all superannuation funds that have offshore investments.

The Australian also reported that regulators must go easy on superannuation funds for making investment losses, as they will risk undermining member confidence in funds. Warren Chant, director of industry consultants Chant West, echoed Delaney’s claims, telling the publication that most funds used some amount of currency hedging to guard against fluctuations in the value of their overseas assets. Consequently, all those funds would have lost money following the financial crisis when the dollar plunged.

In March, aiCIO explored the greater commitment to currency exposures among Australian schemes as a result of the global financial crisis (GFC).

“Speaking broadly, the GFC has brought to life the idea that funds need to dynamically manage their currency exposures,” said State Street Global Services Head of Sales for Australia Greg O’Sullivan. Other outcomes of the crisis, according to O’Sullivan, include more stress testing, a greater appetite for outsourcing, and carrying more cash. “The forward spreads in September and October 2008 were immense,” added O’Sullivan’s colleague Ian Martin, Head of SSgA S.E Asia and Pacific and Head of Global Markets Australia & New Zealand. “The cost of hedging was so high that funds now focus a lot more on how much cash they have available—above and beyond the 9% a year that flows into the system.”

“With many capital pools increasing in size (and few are doing so faster than the Australian superannuation funds) and thus likely to outstrip home-market capacity (yes, even American investors will invest more externally), more portfolios will be exposed to currency fluctuations,”aiCIO‘s Editor-in-Chief Kip McDaniel reported. “As they are, funds would be well advised to learn from Australia’s recent travails: Hedge your currency exposure, but be prepared for what that hedge will do.”

Click here to see the new GC Australia — a sister publication to aiCIO — that focuses on the Australian superannuation and alternative fund industry, from a securities services perspective.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href=''></a>; 646-308-2742