Hedging on cards for quake relief fund

The Earthquake Commission, which has $6.1 billion of funds and insurance to cover damage from an earthquake, may start hedging the local currency to avoid overseas investment losses.

The state-owned commission has 30 per cent of its Natural Disaster Fund in overseas stocks and had currency losses of $77 million on the holdings last year, cutting returns to 13 per cent below target, its annual report showed.

The New Zealand dollar rose 19 per cent in the 12 months to June 30 and reached a 16-year high of 72USc late last week.

The biggest earthquake in 70 years, measuring 7.3, shook the South Island last week.

A similar-sized quake on the fault line below Wellington could result in $7 billion of claims, forcing the commission to liquidate investments, it said.

As the New Zealand currency rises "we're showing heavier and heavier unrealised capital losses", said David Middleton, the commission's general manager.

"That's what causes us to think" it may be prudent to hedge, he said.

The commission would need Government approval to start hedging against movements in the New Zealand dollar against the US dollar and other currencies, such as buying forwards contracts at an agreed rate now.

It has preferred not to buy currency cover because it expects the New Zealand dollar would drop after a major disaster, giving it a "natural hedge" at a time it would need to bring home overseas funds, Middleton said.

Of the commission's $1.3 billion in overseas stocks, 40 per cent is invested based on weighting of stocks in Morgan Stanley Capital International's World Index, which rose 8.8 per cent this year in US dollar terms, according to the MSCI.com website.

The commission uses the un-hedged MSCI World Index with net dividends reinvested in New Zealand dollars.

The remaining 60 per cent is actively managed by four US fund managers - Tweedy Browne Co, Alliance Capital Management LP, Marvin & Palmer Associates and Capital International Inc.

Two-thirds of the Natural Disaster Fund is in New Zealand government debt, which it holds to maturity.

Its government bond holdings returned 1.7 per cent last year, giving the fund an overall return of 4.7 per cent against the commission's target of 2.7 per cent, according to the annual report.

The Government allowed the fund to buy overseas stocks starting in November 2001 to ensure it had funds outside the region that would be affected by an earthquake.

At the time, the New Zealand dollar bought 41.57USc and it has soared about 70 per cent since then.

The country's alpine fault, which runs the length of the South Island along the Southern Alps, is a similar size to the San Andreas fault in California.

Of more concern to the commission is the 70km-long Wellington fault under the capital, home to about 300,000 people.

The Wellington fault last moved some 300 or 400 years ago and has an average turnover - the gap between movements - of 600 years, according to Warwick Smith, a seismologist at the Institute of Geological and Nuclear Sciences in Wellington.

- BLOOMBERG

Quake insurance

* The New Zealand Earthquake Commission has $6.1 billion of funds to cover damage caused by a quake.

* It is considering hedging to offset the effects of the rising kiwi dollar.

* It estimates a quake in Wellington similar to the one that struck the South Island this month would force it to liquidate its investments.

* It has so far avoided hedging because a quake would likely cause the dollar to fall.