The biggest factor affecting superannuation funds is currency strategy, according to the results of National Australia Bank's (NAB) Superannuation FX Survey 2011.
This year, NAB surveyed 49 of Australia's largest super funds, representing 79 per cent of the market.
The results found that super funds dedicated 17 per cent of their portfolios to exposed currency movements, which represented $89 billion of the $523 billion worth of the assets surveyed.
NAB's Global Head of Financial Institutions, Funds and Insurance, Donald Hellyer, said the sheer size of this allocation made the survey results "little short of explosive".
"By doing nothing more than hedging foreign equity positions, managers would have made a 4.5 per cent positive return, even if the equities didn't move at all, while unhedged managers would have lost 12.7 per cent due to currency moves," said Hellyer.
"Funds receive that positive return because when you are hedging back into Australian dollars you get the high Australia interest rates which we are currently experiencing and you would have to pay away foreign interests rates, which are very low."
In determining the cumulative contribution to return rate over an 11 year period from 2000, NAB found that super funds that fully-hedged their portfolio made cumulative gains of 69 per cent, or at least a 1 per cent return every year.
"With the US Federal Reserve aiming to keep interest rates close to zero over the next two years and the Yen and many European currencies on very low interest rates, there is a real financial benefit for Australian super funds in hedging through exchange contracts," said Hellyer.
However, Hellyer was quick to point out that while 60 per cent of surveyed funds regularly adjusted the amount by which they hedged their international equities, the change of currency exposure was less than 1 per cent.
"This indicates that super funds are finding it difficult to work out what to do with currency," he said.
Hellyer also said the volatility in the market had forced many super funds to re-evaluate the importance of the strength of the Australian dollar, with the survey finding that 78 per cent of funds either will or may change their hedge benchmarks based on the value of the Australian dollar.
