(Bloomberg) – Australian pension funds are increasingly using the Australian dollar as a natural buffer to offset shocks in foreign markets, even as they increase currency hedging.

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Currency hedging for offshore equity portfolios increased for the first time since 2015, according to the Superannuation FX Hedging Survey from National Australia Bank Ltd. published Tuesday. Yet at 33% coverage, it remains well below the 75% level that regulators deem neutral.

Read more: Australian pensions see foreign currencies as a cushion

“There is clearly a strong tendency to maintain an under-hedged position – or higher exposure to foreign currencies – as a potential buffer against any significant no-risk event,” the report said. Almost a third of funds also do not fully hedge currency exposure in asset classes outside of international equities, he said.

While the Aussie tends to fall during global market shocks, making overseas investments more valuable when repatriated in local currency, the Australian Prudential Regulation Authority’s performance tests for industry assume the funds fully hedge infrastructure, real estate and fixed income exposures.

Almost two-thirds of the country’s pension funds plan to increase their allocation to stocks, infrastructure and real estate outside Australia over the next two years, according to the survey. This comes as APRA is stepping up its review of the fund’s investment performance as they manage more money overseas with the aim of achieving higher returns and diversification.

Three-quarters of the country’s pension funds now view the currency in terms of target exposure rather than traditional hedge ratio, up from 57% in 2019, according to the report.

“Currency is now the biggest investment risk in the portfolio after equity market risk,” said Drew Bradford, executive managing director for markets at NAB. “Super funds are increasingly treating foreign currencies as an asset allocation, as they would any other asset class.”

Spirit’s super chief investment officer Ross Barry agreed that the currency can act as a kind of natural hedge, while cautioning against assuming it always will.

“The Australian dollar has tended to play this role a bit because it has tended to fall during times of risk, particularly due to falling commodity prices and other effects of a downturn. global growth, ”he told Bloomberg Television. “We always have to be a little careful when relying on historical relationships to keep in the future.”

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