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Managing currency

In managing currency risk, we conceptually consider offshore investments on a fully hedged basis and then separately evaluate to what extent we wish to hold an exposure to foreign currencies. We explicitly manage the size and nature of the foreign currency exposures rather than allowing them to be shaped by the underlying investments.

We hold foreign currency exposure for a variety of reasons. We believe it can enhance portfolio diversification, in particular through access to defensive currencies that provide returns and liquidity in times of market stress and protect purchasing power when the Australian dollar weakens.

Currency exposure for the Future Fund and the Medical Research Future Fund in 2018-19 is discussed in the Investment Performance section of this report. In the case of the DisabilityCare Australia Fund and the Nation-building Funds, given their higher domestic weighting and the conservative nature of these investment programs, we fully hedge all foreign currency exposures back to Australian dollars. In 2018-19, given the Aboriginal and Torres Strait Islander Land and Sea Future Fund was invested in a combination of cash and short-term deposit instruments, currency exposure was managed in line with the DisabilityCare Australia Fund and the Nation-building Funds.