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Policy: Foreign currency management

Purpose

This Foreign Currency Management Policy documents the University’s foreign currency management as part of the overall management of its investment assets.

Overview

The Foreign currency management policy details the key objectives of the foreign currency exposure within the University’s investments:

  • Foreign currency management is to be consistent with the long term investment objectives outlined in the Investment Policy Statement.
  • Investments in overseas asset classes are made to achieve industry and geographical diversification to enhance the overall return of the portfolio and to reduce risk.
  • Foreign currency is not a separate asset class.
  • Currency markets are volatile and currency exposures impact the foreign currency-denominated investment returns. Foreign currency exposure is to be managed.

Scope

This Policy applies to all funds held in the University’s investment portfolio.

Policy statement

Background

  1. The University is a long term investor and considers the following when determining its foreign currency exposure:

Risk reduction

  • Depending on the relationship between the return of the currency and the return of the foreign asset in local currency terms, it may theoretically be beneficial to maintain foreign currency exposure on the grounds of reducing overall volatility.
  • Inflation erodes purchasing power of a currency, thus demand for a currency typically falls when inflation is expected to be higher relative to another currency. Under Purchasing Power Parity Theory, currency movements “correct” for relative inflation levels. Thus, foreign currency exposure acts as a hedge against relatively higher domestic inflation.
  • The strength of reversion to PPP levels is typically weak and there is historical evidence of significant over and under-valuations relative to PPP levels persisting for many years. Purchasing Power Parity Theory tends to better explain movements in currencies over the very long term.

Hedged

  1. Portfolios with the currency exposure completely hedged experience the following return outcomes:
  • Protection from movements in the value of the currency and;
  • Hedging the currency exposure allows the capture of the “hedge-pick up” or the interest rate differential between the monetary policies of the two countries.

Unhedged

  1. Portfolios with the currency exposure completely unhedged experience the following return outcomes:
  • There is no protection from movements in the value of the currency. The value of the underlying foreign asset will decrease in Australian dollar terms should the AUD appreciate: and
  • The value of the underlying foreign asset will increase in Australian dollar terms should the AUD depreciate.

Approach to foreign currency management

  1. The Council, through its Finance Committee, will approach currency management in the following manner:
  • The foreign currency exposures are to be considered at the total portfolio level;
  • A dynamic approach will be applied to managing currency exposure
  • Foreign currency assets will be left unhedged where the cost or complexity of hedging is prohibitive, or if there is strong expectations that those currencies will appreciate over the medium to long term (for structural reasons rather than dynamic valuation reasons).

Risk management

  1. The Council, through its Finance Committee, will have regard with the various risks associated with currency management. The key risks of currency management include:
  • Market Risk is the risk of loss arising from movements in currency market movements.
  • Counterparty (credit) Risk is the risk of loss due to the default by a counterparty to meet its obligations under a currency transaction.
  • Reporting risk is the risk the University is not able to accurately ascertain the value of its foreign currency exposures in the LTIP.

Foreign currency exposure management

  1. The table displayed below reflects the SAA foreign currency range for the LTIP.

Foreign Currency Exposure Target positions

Foreign Currency View rel. to AUD

Extremely Unattractive

Unattractive

Fair Value

Attractive

Extremely Attractive

LTIP

75%

55%

20%

5%

0%

Dynamic currency management framework

  1. The Council, through its Finance Committee, and subsequently through the Investment Office, applies a dynamic approach to managing currency exposures with a view to achieving the objectives of currency management. These decisions will be consistent with the University achieving its long term investment objectives.
  2. The Finance Committee will consider the following factors when determining changes in the levels of foreign currency exposures:
  • Economic conditions
  • Valuations
  • Sentiment
  1. The table below reflects the suggested dynamic ranges for the foreign currency exposures for the LTIP.

Foreign Currency Exposure Range

LTIP

0% - 75%

  1. The Investment Office will achieve the desired foreign currency exposure through the following mechanisms:
  • The allocation to asset classes with foreign currency exposure and;
  • The level of currency hedging within asset classes with foreign currency exposure

Implementation

  1. The Investment Office will implement currency hedging within the ranges of the SAA (see paragraph 6). When desired, specialist investment managers with expertise in currency management are employed when active currency management in a hedging overlay structure is desired.
  2. Implementation of currency management is completed in accordance with the use of derivatives as stipulated in the Investment Policy Statement and the Derivative Risk Management Policy (Section 6).
  3. Currency management must be undertaken using Australian dollar as the base currency.
  4. Currency management activities are to be limited to the establishment of an adjustment of, long only positions of the Australian dollar. No net short positions of the Australian dollar to be held.
  5. Currency management activities are to have an absolute limit of 100% of the current market value as established by the custodian.
  6. It is permissible to have different exposures in relation to individual currencies and the desired level of foreign currency exposure within the portfolio. For example, the desired level of foreign currency exposure for the LTIP could be 20%, however the exposure to the Japanese Yen on Japanese domiciled assets within the portfolio may be 100%.

Counterparties

  1. Contracts are only to be established with counterparties with the highest credit rating of A1/P1 or better for short term payment ability. Approved counterparties and limits are to be established by the Director of the Investment Office with the initial approval of the Finance Committee and reviewed periodically.
  2. The Director of the Investment Office will notify the Chief Financial Officer of any changes to either the approved Counterparty List and or the respective limits within five business days.

Benchmark

  1. The performance of currency management will be applied against the strategic benchmark of the LTIP on a monthly basis.

Reporting

  1. Portfolio valuations and foreign currency exposures are provided to the Finance Committee for the portfolios by the Investment Office and are based upon valuations provided by the Custodian.
  2. Foreign currency exposures should be within tolerance limits previously approved by the Finance Committee at the time of reporting to the Finance Committee. Should the foreign currency exposure exceed the tolerance levels, the Investment Office will be required to correct these levels to within tolerance within 48 hours.

Review of this procedure

  1. This procedure will be reviewed at least annually by the Finance Committee or more frequently if:
  • Meaningful change is made to the investment selection process;
  • Relevant legislation or regulation requirements change.
  1. When required, the Corporate Governance and Risk Office will audit and report to the Audit and Risk Management Committee and the Finance Committee on the appropriateness of, and compliance with, this procedure.

Delegations relevant to this policy

  • 346: Buy, sell and subscribe for Cth Bonds and Treasury: Up to $250,000 for Student Managed Fund.
  • 348: Place/withdraw investments in negotiable certificates of deposit and interest-bearing bank deposits: Up to $500,000 for Student Managed Fund.
  • 350: Buy and sell accepted bank bills: Up to $500,000 for Student Managed Fund.
  • 351: Buy and sell listed fixed interest securities: Up to $250,000 for Student Managed Fund.
  • 356: Buy, sell and subscribe for equity securities and options: Up to $500,000 for Student Managed Fund.
  • 357: Buy, sell and subscribe units in property trusts listed on the Australian Stock Exchange: Up to $250,000 for Student Managed Fund.
  • 448: Invest in Cash Management Trusts: Up to $750,000 for the Student Managed Fund.
  • 449: Execute investment transactions (subject to investment policy & procedures).
  • 450: Execute a term deposit (subject to investment policy & procedures).
  • 362: Buy and sell investment property, subject to Finance Committee endorsement.
  • 451: Execute management contracts, lease and other agreements in relation to the management of investment properties (subject ot investment policy & procedures).
  • 452: Authorise expenditure in relation to maintenance and capital improvements of investment properties within budget.
  • 453: Appoint investment consultants.
  • 454: Appoint fund managers, subject to endorsement by Finance Committee.
  • 455: Appoint investment custodian.

Information

Printable version (PDF)
Title Foreign currency management
Document Type Policy
Document Number ANUP_017812
Version 2
Purpose This Foreign Currency Management Policy documents the University’s foreign currency management as part of the overall management of its investment assets.
Audience Staff
Category Governance
Topic/ SubTopic Finance - Investments
 
Effective Date 6 Apr 2018
Review Date 6 Apr 2021
 
Responsible Officer Chief Financial Officer
Approved By: ANU Council
Contact Area Finance and Business Services
Authority Australian National University Act 1991
Public Governance, Performance and Accountability Act 2013