The NAB Superannuation FX Survey has discovered that 72 per cent of Australian funds plan to increase their share of offshore investments over the next two years and are considering incorporating unlisted assets such as private debt, infrastructure and real estate.

On average, Australian super funds currently hold around 41 per cent of assets offshore.

NAB’s executive general manager of markets, Drew Bradford, said the survey “is a poignant snap shot of what Australian superannuation fund managers are thinking and how they plan to approach investment strategy and foreign exchange risk in the low interest rate world”.

“The results show that at the same time that funds are increasing their offshore holdings, they are hedging less of their FX exposure to take on more FX risk,” he continued.

He explained that this is because super funds “want to be more responsive to market movements, such as a perceived large undervaluation or overvaluation of the Australian dollar”.

According to the report, the average hedge ratio applied to international equity exposure has fallen to 29 per cent in 2019 from 39 per cent in 2017.

Mr Bradford said that this drop is likely reflective of the downtrend in the Australian dollar, from above 80 US cents at the time of the 2017 survey to nearer 70 US cents in 2019, with expectations that it could fall further.

The results also highlighted how funds are increasingly using target percentages for foreign currency exposure rather than traditional hedging ratios.

For funds targeting a percentage of foreign currency exposure, the average desired exposure is 24 per cent in 2019, based on the MySuper or the default option of the fund.

“The move away from traditional hedging ratios is a seismic shift in thinking,” Mr Bradford said.

“More funds want to view currency risk through the same lens as other asset allocation decisions and feel that running a higher foreign exposure is a cost-effective way to protect against any deterioration in risk sentiment,” the manager noted.

It was reported that the survey examines the hedging techniques of 61 Australian superannuation funds with $1.82 trillion of assets under management, which incorporates around 90 per cent of industry assets under management, excluding SMSFs.