Major Australian pension fund says Aussie dollar is undervalued, increases currency exposure

A major Australian pension fund has increased hedging on its international equities, arguing the Australian dollar is undervalued as the Reserve Bank of Australia tightens policy while most major central banks pause or prepare to cut rates.

Jeff Brunton, head of portfolio management at HESTA, which manages A$100 billion in assets, said the fund has raised its exposure to the Australian dollar, citing long-term valuation models that point to persistent undervaluation. By increasing currency hedging, HESTA aims to protect portfolio returns if a stronger Aussie dollar erodes the local-currency value of overseas investments.

The move contrasts with the traditionally low level of currency hedging among Australian investors in U.S. equities, where the U.S. dollar has typically been viewed as a shock absorber. HESTA is the second large fund to adjust its strategy recently, following similar steps by Australian Retirement Trust.

Analysts note that increased Australian dollar buying by pension funds could add upward pressure to the currency, which rose 4.3% last month to a three-year high and has gained nearly another 1% in February. Support has also come from the RBA’s recent 25-basis-point rate hike to 3.85%, strong commodity-driven trade surpluses, and Australia’s yield advantage over other G10 economies.

HESTa currently holds A$23.45 billion in international equities, and Brunton said the fund remains underweight foreign currencies relative to both its long-term targets and its peers.

Sources: Reuters