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Susan Edmunds
Susan Edmunds
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Advisers told: Don't gamble on forex

Monday 1st of February 2016

Melville Jessup Weaver (MJW) has released new data which shows that over the 20 years to December 31, the return on unhedged equities was 5.7% per year, compared to 8.4% for hedged equities.

Hedging allows insurance offers insurance against currency moves. Without it, international investments would suffer when the NZ dollar appreciates.

Mark Weaver, of MJW, said the better performance of hedged equities over the past 20 years was because of the difference in interest rates between New Zealand and other countries.

"When you hedge the currency you are effectively leaving your money earning interest in an NZ bank while you are effectively borrowing from say a US bank to buy your shares with.  Interest rates in NZ are higher than in the US due to the risk premium from investing in NZ.  Even now we have the NZ OCR at 2.5% and the US Fed rate at 0.5%, a difference of 2%.  Over the last 20 years the difference has been between 2% and 3% per annum and explains the high figure you have of 2.7% [difference between hedged and unhedged returns]," he said.

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Paul Flood: The danger is that the 'goalposts' (regarding what is acceptable or unacceptable adviser conduct) may be susceptible to change. Our 'Principles based' legal/regulatory environment lends itself to “prevalence-induced concept change” over time, perhaps not so much in the written laws and Code, as in the interpretation of the prescribed principles.
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Just a tip, if you use more than six, six letter words in a sentence you lose most Kiwi's. So avoid client/adviser confusion when writing your post or article if you would like it read and understood. Ironically, my last sentence was not likely read.
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FMA outlines its latest expectations for advisers
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To correct errors in my previous post: "policies, templates, and controls" should read "policies, processes, systems and controls", and "is more conductive" should read "is more conducive".
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