Superannuation returns hurt by Australian dollar but experts say the pain is over

Superannuation funds have been struck by the appreciation of the Australian dollar in the past year, with the average fund detracting up to 3.5% due to the currency rising over 30% over the past year, research agencies have said.

But despite economists’ expectations the Australian dollar will remain above parity for the rest of the year, superannuation experts say the local currency won’t hurt super returns if it doesn’t appreciate any further.

“The hurt is already gone,” SuperRatings chief executive Jeff Bresnahan says. “So when the dollar appreciates it hurts international share exposure, but if the dollar remains steady then it won’t hurt on earnings going forward.”

New research from Chant West shows the median superannuation growth fund remained “relatively flat”, returning just 0.2% for April 2011, resulting in a cumulative return of just 10.2%.

Intentional shares returned 2.5% in hedged terms, but this was reduced to just 1.4% because of the Australian dollar.

Over the past year, all super accounts have returned just 4.8%, while “balanced” funds have returned 6.1%. High growth funds have returned just 5.6%.

Chant West director Warren Chant said in a statement that with only two months remaining in the financial year it is likely that super fund holders will record a return, but that the return would have been higher if the dollar did not appreciate so much.

“Our dollar appreciated against all major currencies over the financial year to date, including a 30% rise against the US dollar… Unless you hedged against that currency movement, it took a big chunk out of the value of your overseas investment returns.”

“We estimate the currency detracted about 3.5% from the typical growth fund return over the financial year to date with the better performing funds being those that edged more against the Australian dollar.”

Many super funds hedge their exposure with bonds, property and infrastructure, but analysts from both Chant West and SuperRatings say the appreciation of the dollar was too rapid to account for.

Recent figures from SuperRatings also show balanced funds are hurting from international exposure. While the overall result for April was an increase of 0.15%, along with a 1.57% increase for the quarter, Bresnahan says the “performance of international shares continued to be a sore point for balanced funds”.

“No matter how well global sharemarkets perform, we don’t seem to be able to capture the returns on offer. Instead we get negative returns.”

“Just look at US and UK equities which gained almost 3% in May, yet the median international share option return fell -0.5%, with gains eroded by a 5% increase in the Australian dollar. To a lot of members, this wouldn’t make sense.”

But Bresnahan also points out the issue of hedging isn’t as simple as it seems. While hedging did have an effect, (in one case, hedging would provide a return over 14 percentage points above a non-hedged alternative), he says currency movements are hard to predict.

“But what if we had been fully hedged in February 2008, when then Australian dollar then collapsed 30% over the next 12 months? Or what if the Australian dollar now retreats below $US1?”

“It is because most funds do not think they have the skill to or think it’s possible to add value by predicting currency movements, that they only partially hedge with the primary objective being to smooth out adverse movements in the Australian dollar over the longer term.”

As for this year, he says it will be a “solid result”, especially that the dollar is not expected to appreciate any further. But there are still several factors impacting on super results – including volatile movements in currency.

“I think sharemarkets internationally and locally are still very volatile. Predicting where they are going to go is extremely difficult. You can drag it out and make some guesses, but there are things that can come out of the blue.”