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Advisers offered flexible currency product

Adviser will be the gatekeepers of Pathfinder Asset Management's new set of funds, which invest in global equities and allow individual investors to pick their own currency hedging ratio.

Tuesday, October 18th 2011, 7:00AM 7 Comments

by Niko Kloeten

The World Equity Funds are available through financial advisers who can advise their clients on a preferred level of hedging according to their risk profile.

"Flexible currency hedging is not generally available to retail investors in New Zealand," Pathfinder executive director John Berry said.

"We want to ensure that people are properly advised on currency by investing through an authorised financial adviser."

Chairman Sandy Maier said the funds are unique because they give investors cost efficient and diversified access to global equities with the ability for each investor to select their own currency hedging ratio for their individual risk profile.

"The funds are designed for investors who want to choose their preferred exposure to the currency matching their risk appetite and currency outlook."

Investors may choose to protect their investment from the volatility of NZ dollar movements by implementing a 100% hedge, or they can opt for a low hedging ratio, depending on their appetite for risk and view on the currency.

"This provides a tool for investors who want the flexibility of having currency exposure at some point of their investment timeframe while removing currency exposure at other times," Maier said.

In the last 12 months the New Zealand exchange rate (when measured against the US dollar) has fluctuated between $0.72 and $0.88, close to a 20% range, without yet taking into account whether the investors' underlying investment has gone up or down in value.

Berry said NZ dollar movements significantly influence global investment returns.

"Fluctuations in the New Zealand dollar create investment gains when the dollar falls, and conversely losses when the New Zealand dollar rises. This presents investors with both risk and volatility. Many investors do not want gains and losses from currency fluctuations, but do not have the investment tools required to manage this."

The funds are split into two investment offerings. One fund assumes zero currency hedging (Fund U) while the second fund (Fund H) hedges against a range of currencies, reflecting the underlying equity exposure.

Investors can select their desired after tax hedging ratio by holding a mix of Fund U and Fund H units. On a monthly basis investors can, at no cost, change their mix and so adjust their currency hedge if their outlook on the exchange rate has changed.

The minimum initial investment for direct investors is $10,000 with no minimum amounts for investors via a wrap platform.

Niko Kloeten can be contacted at

Tags: financial advisers

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Comments from our readers

On 18 October 2011 at 9:46 am Forthright said:
Is this the same Sandy Maier who predicted South Canterbury will break even, then went on shortly after to leave the tax payers will a $1b loss to guarantee? I personally have not met an investor who wanted to choose their preferred exposure to the currency matching their risk appetite and currency outlook.

It would be the bravest of the brave AFA’s who wanted the compliance risk. The downside associated with getting the currency calls wrong would put the fiercest blow torch on the AFA’s research process.
On 18 October 2011 at 11:39 am ian said:
Irrespective of the relative merits or otherwise of the fund it is difficult to see how advisers can ignore currency hedging. If they do I can't see how they comply with the Trustees Act for their trust investors the Act requires advisers to take a higher duty of care and responsibility? ie to act as a fund manager would. Even for individual investors it can not be ignored. Currency can have a major impact on returns. I think the writer misses the point that appetite for risk is determined by the client. The advisers job is to advise on the best way to construct a portfolio for a given risk profile. Ignoring currency is not the way to go hedging currency risk to reduce volitility comes at a cost in terms of the return but how can it be ignored if the clients risk profile is appropriate when there are prodcut offerings in the market that allow advisers to manage this risk?
On 18 October 2011 at 11:57 am John Berry said:
Forthright – you seem to suggest ignoring currency risk. That is likely to be more of a risk to your clients (and your own practice) than actively taking steps to manage currency risk. Just because you “wish” a risk away does not mean it actually does go away. When you choose to ignore a risk, you are actually making an active decision.

If your clients have offshore equity exposures (directly or via offshore managers) you are actively deciding to take a 0% currency hedge. Maybe you already invest with a NZ fund manager who 100% hedges – but make no mistake, as an adviser if you use them you are actively choosing to 100% currency hedge.

For the record, Pathfinder is regularly publishing our view as a fund manager on an appropriate after tax currency hedge position for NZ investors. Advisors using our World Equity Funds can choose to follow this (or deviate) as they see fit.
On 18 October 2011 at 2:03 pm Craig Simpson (Dentice Simpson Consulting Ltd) said:
I agree with Ian & John Berry. Advisers can not put their heads in the sand and ignore currency risk management strategies.

There is a chance that by not considering a risk management strategy advisers are going to fall short of meeting their duty of care obligations.

If advisers adopt a sound risk management policy for a clients currency exposure - this could be to be fully hedged, partially hedged or unhedged, and this decision is supported by sound research from people who are qualified and competent and your client is fully informed on the costs, economic benefits and disadvantages etc then advisers should not be too concerned.

Where clients and advisers will come unstuck is when they use currency overlay products to speculate on currency movements.

The Pathfinder research on the topic of currency hedging is very good and comes to a logical conclusion. I would recommend everyone read this literature and form their own opinions.
On 18 October 2011 at 2:54 pm Fothright said:
Every study and research paper I have read on currency hedging comes back to the ultimate truth, currency hedging is a nil sum process, over the long term. To claim an AFA should or could have the omniscience to make consistent currency calls is absolute balderdash. Perhaps John Berry should consider limiting his offer to only a actively currency managed international equity fund and stop trying to con AFA’s into thinking they can consistently add value by being defacto currency managers.
On 18 October 2011 at 5:08 pm John Berry said:
The NZD floated against the USD at $0.44 in 1985. It is now trading at $0.79. That is a 79% appreciation over 26 years (hmmm, a zero sum game?!). In fact I am not aware of any research on the New Zealand dollar proving that since floating hedging is "a zero sum game". The NZD has appreciated vs USD over 5, 10 and 20 year time horizons – it’s a similar story against most other currencies.

The most overlooked feature of currency hedging is that for investors in countries with consistently higher interest rates (i.e. NZ) hedging generates a benefit for investors. This is called the "forward point premium" – and has typically been a benefit each year for NZ investors.

We do not advocate that investors or advisers should "day trade" currency or even change views monthly. That approach is not currency management but speculation - bound to end in tears. What we advocate is a researched and well thought out approach to currency hedging with a medium to long term view. Any approach to currency must be mindful of (1) global macro influences and cycles, (2) attributes of the underlying asset class (i.e. correlation to currencies), (3) individual investor preference/tolerance to risk, return and volatility. As a fund manager we can research and express a view for advisers on points (1) and (2). Your job as an adviser is to answer point (3) - you should not ignore the risk, return and volatility impact currency has for each of your clients.
On 18 October 2011 at 5:24 pm Craig Simpson (Dentice Simpson Consulting Ltd) said:
Recent research published by Deutsche Bank out of Europe (dated 3 August 2011) suggests currency hedging is a growing consideration for investors and that currency returns can significantly alter an asset's return stream especially when large currency moves occur.

Deutsche Bank note that currency has increasingly been recognized as a separate asset whose pricing is driven
by fundamentals that can differ from those which impact the underlying
asset market. Purchasing an un-hedged exposure could therefore increase risk in a portfolio.

There are many other examples of articles and academic literature available on the internet that supports hedging.

Commenting is closed



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