Australian Superannuation Funds Rethink US Bets Amid Dollar Volatility

Australia's AU$4.2 trillion pension sector is rethinking its long-standing bets on the United States' assets and the dollar, as weakening confidence in American growth and volatile Sino-U.S. trade tensions prompt a reassessment of exposure to the world's largest economy.

Australian superannuation funds typically hold a low level of foreign exchange (FX) hedging for their overseas stock portfolios. But when U.S. markets dropped this year, some funds allowed their hedging ratios to rise by not fully adjusting their currency positions.

Troy Fraser, head of FX sales for Citi in Sydney, said pension funds were now reviewing their investment mix, hedging costs, and the current strength of the Australian dollar, Reuters reported.

If the trend continued, it could impact the currency. Citi estimated in February that a 5% shift in hedging could push the Australian dollar up by as much as 11% against the U.S. dollar.

US exposure under review

Australian super funds invest heavily in equities—nearly 60% of their portfolios, with about half of that in overseas markets. As of December 2024, around AU$555 billion was invested in U.S. stocks by Australian-based investors, according to Westpac.

Some fund executives have confirmed they are reviewing their U.S. allocations, but not all are making changes. The AU$139 billion fund UniSuper, for example, said it is not increasing its hedging ratio, which generally ranges between 30–40%.

"Like every other fund, we are questioning our exposure to the U.S. It would be fair to say that we've hit peak exposure and will be reducing over time," said John Pearce, chief investment officer of UniSuper, said.

However, AustralianSuper, the country's largest super fund with over A$365 billion under management, told the Financial Times it still plans to direct more than half of its offshore investments into the U.S.

Rising Aussie dollar adds pressure

The Australian dollar has gained 3% against the U.S. dollar this year. That has turned a modest 0.6% drop in the S&P 500 into a 3.5% loss when measured in Australian dollar terms.

Cameron Systermans, head of multi-asset Asia-Pacific at Mercer, warned that a continued rise in the Australian dollar could force funds to rethink their strategies.

"If there were to be a durable uptrend in the Aussie dollar, that would be a bit of a pain trade, I think, for a lot of the asset owners in Australia. And it might force them to really reassess whether that still makes sense," Systermans said.