MLC Inflation Plus portfolios on the importance of managing FX

Funds Management

by Clive Tompkins

MLC Portfolio Manager, Dr Ben McCaw talks about the importance of foreign exchange exposures within the MLC Inflation Plus portfolios and how short-term volatility is managed.

Sinead Rafferty: Hi, I'm Sinead Rafferty, Portfolio Specialist at NAB Asset Management and today I'm joined by Dr Ben McCaw, Portfolio Manager at MLC. Welcome Ben.

Dr Ben McCaw: Thanks Sinead.

Sinead Rafferty: Ben, one of the strategies that's becoming more and more prevalent within the MLC portfolios is monitoring the currency exposure. Can you tell us about that role that plays in the portfolios?

Dr Ben McCaw: Foreign currency is a very important exposure in the portfolios. It's as important as any other asset class like equities and fixed income. But it's been particularly important for say the past 10 years or so, while interest rates have been extremely low. During that time we've found that it's been very difficult to diversify the portfolios using traditional fixed income exposures, this is particularly true for Inflation Plus. So foreign exchanges come as really a high index role in us controlling risk for the portfolios. But when it comes to foreign exchange it's not just a case of say looking at your unhedged versus your hedged exposure. Each individual currency pair can bring particular characteristics to the portfolio and it's the blend of foreign exchange exposures that's really important, that motivates us to embed as much as we can to the portfolios, without extending risk too much.

Sinead Rafferty: So Ben, one of those currency pairs is the Australian dollar versus the US dollar, which has fallen sharply over the last year. Can you tell us how that influences your risk management strategy?

Dr Ben McCaw: The US dollar has strengthened quite a bit over the past year and the Australian dollar's weakened at the same time, so from an Australian dollar/US dollar point of view, that change in price has been quite profound, but what hasn't happened over the past year is the Australian dollar hasn't weakened terribly much against other foreign exchange pairs like the Yen, the Euro, and Stirling. So while we've lost some of the potential for diversification and risk control through the US dollar, we've found some more by exposing the portfolios more to US, Yen, and Euro, and bringing down the US dollar exposure at the same time.

Sinead Rafferty: Finally Ben, emerging market volatility has had a major impact on the Australian dollar in recent times. How does has that influenced how you manage the short term performance of the portfolios?

Dr Ben McCaw: So while we manage the currency exposures ourselves or determine which currency exposures we want, when it comes to actually determining how we're going to implement that in markets, we work very closely with our internal derivatives team. For example, I talked earlier about the role of some of the important G10 currencies in our risk management exposures. Now the issue there is that we're usually thinking on a 3, 5, or 7 year timeframe for the currencies to deliver what we think they can to the portfolios, but the reality is that foreign exchange is very volatile over the short term. So one of the things that the derivatives team has done for us, is design a strategy that helps us walk through the shorter term volatility but maintain the long term exposures that we think are ultimately beneficial for the portfolios.

Sinead Rafferty: Thanks for your time Ben, and thank you for joining us.


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