The notoriously volatile NZ dollar has fallen about 12 per cent against the US currency since July. While exporters might celebrate, not all global share investors have joined the party. Investment consultant Mark Weaver explains why.

Global equities proved to be the standout asset class for New Zealand investors during the September quarter - at least for those brave enough to take on currency risk in their portfolios.

As the Melville Jessup Weaver (MJW) quarterly investment survey shows , the unhedged MSCI global shares index returned 9.9 per cent over the three months to September 30 compared to only 1.7 per cent for the hedged version of the same index.

The significant 8.2 per cent return differential between the two MSCI variants, of course, was due to the depreciating NZ dollar, which fell almost 12 per cent against the US currency over the period.

But in historical terms, the September quarter currency boost for unhedged global share returns was something of an anomaly for New Zealand investors.


According to a recent MJW analysis , over the last decade New Zealander investors, for the most part, have been well-rewarded for fully hedging any currency exposure out of global shares.

Except for a brief period during the height of the GFC, the 100 per cent hedged global equities portfolio outperformed the unhedged version by a large margin.

According to our calculations, over the 10 years to September 30, 2014, hedged global shares beat unhedged by a somewhat large 1.3 per cent, returning 113.9 per cent and 72.6 per cent respectively.

On an annualised basis, hedged global equities returned 7.9 per cent per annum while unhedged investors would've received only 5.6 per cent each year over the decade.

The superiority of hedged international shares is partly due to the upward trend of the NZ dollar over the period in question. However, it's an aspect of the currency hedging process itself that has added more to the outperformance.

Specifically, most hedging deals include an adjustment that takes account of the interest rate differential between the countries involved in any currency contract - expressed as 'forward points'. As New Zealand interest rates have been higher than in the rest of the developed world for some time, forward points generally accrue to the Kiwi side of the deal.

Currently, forward points are worth 3 per cent per annum while over the last 10 years they have added an average annual 1.3 per cent to hedged global shares for New Zealand investors.

On the downside, however, hedging adds some volatility to global share returns while reducing the diversification benefit of foreign currency exposure.


All New Zealand fund managers with offshore investments have adopted some form of currency hedging for global shares, either through passive or active strategies.

Typically, passive strategies follow either a 100 per cent currency hedge or hedging only half the value of the global equities portfolio.

Active currency management is naturally a more difficult trick to pull off as it involves a large degree of prediction and timing: it's not a popular choice.

(Curiously, ASB applies an active currency overlay on its passive funds. In fact, the currency bet pushed ASB KiwiSaver growth and moderate funds to the top of their respective performance tables for the September quarter.)

Given that a greater number of New Zealanders today have exposure to international equities via their KiwiSaver schemes, fund manager hedging strategies are arguably becoming more important to retail investors.

While most KiwiSaver members can't - and probably shouldn't - attempt to manage their hedging levels, it's certainly useful to understand how their funds are managing currency risk and what effects that might have on returns.

And with the Kiwi moving down again, the currency issue is back in the frame for most New Zealand investors, including KiwiSaver schemes.

Effectively, investors have two choices:
Ignore the current level of the NZ dollar and take a long-term approach to hedging that balances the gains of forward points against the potential higher volatility of returns and lower diversification; or,

Weigh-up the market views on where the Kiwi is heading and take a position on if, when and how much to tinker with currency hedging levels.

Either choice is valid but, as the September 2014 quarterly global equities results show, currency exposure is a force too powerful to be ignored.