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 niko@goodreturns.co.nz
| « MED to look into overseas convictions loophole | KiwiSaver mismatch a 'huge challenge' for advisers » |
Special Offers
Comments from our readers
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.
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.
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.
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
|
|
Printable version |
|
Email to a friend |
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.