Perhaps the assumption that markets are still anchored by predictable economic policies needs to be challenged. For the first time since the fall of the Berlin Wall, political volatility – once background noise – is potentially reshaping investment risk at a structural level.
Despite authorities taking their foot off the environmental, social and governance pedal and recent volatility in equities and bonds, the benefits of Artificial Intelligence and improved investor transparency are just beginning.
Super funds unfazed by FX scandals
The NAB biennial super fund foreign exchange survey is one of the industry’s more worthwhile studies. In the wake of the FX scandals overseas during 2012-2014, this year’s survey should have been particularly interesting. But super funds are not fazed by their FX positions and counterparty risks, the survey indicates.
The survey results published last week show that currency moves and the Government’s ruling on foreign exchange losses, from a tax perspective, to do with the domicile of counterparties, were big issues for funds. Unfortunately, super funds are not questioned in the NAB survey on the trust they afford their FX service providers, nor the efficiency they believe their FX partners provide.
The survey report said: “One consideration of the number of counterparties is the tax treatment of foreign exchange losses and the domicile of the counterparty. The Australian Tax Office’s Taxation Ruling TR 2014/7 was a key consideration often cited by respondents during the survey.
“The ruling sets out when FX hedging gains are considered foreign-sourced and when FX hedging losses reasonably relate to foreign income. For those funds that do undertake significant FX hedging, the Ruling can affect their entitlement to foreign income tax offsets (FITO) as it applies to the calculation of the FITO limit – i.e. cap on the amount of foreign tax credits that can be claimed.
“If a counterparty is considered offshore, then tax credits may not be applied; if domestic then they may. Given the losses accrued from hedging as the AUD has declined, this is possibly a growing critical factor for funds. The Ruling was applied mid-2014 and as such it may not be something we see fully until the next survey.”
On currency movements, which remain the dominant concern with FX from survey to survey, the latest report said: “As in the 2013 survey, currency hedging issues were considered ‘important’ and ‘marginally important’. This was not as strongly felt in 2015 compared to the prior survey, but it remains the most dominant theme in funds’ approach to FX hedging decisions.
“Of the issues that funds felt were the most important for their hedging decisions, most were concerned about the change in the value of the currency. Considering that the AUD/USD has moved -11 per cent since the start of the year, and is down 9 per cent on a trade-weighted basis, this is not surprising.
“A change in the AUD was the most important factor in making changes to hedging for 51 per cent of funds, and enough to provoke a change in hedging for 63 per cent of funds; down from a peak of 88 per cent in 2013.
“The 2015 survey highlights that when the AUD moves significantly, it’s likely that fund investment committees are looking at their hedging decisions and possibly looking to make a change in hedging levels. This should not be a surprise! But it seems that funds are more able to work in this manner, at this time, compared to other periods in the survey.”
