Question: Thanks very much to Peter and the team for organising an insightful Strategy Day last week. The presenters and panels really held my attention. One of the many potential strategies I brought away was the commentary around hedging overseas investments against a potential rising Aussie dollar.
My question is: how would one go about achieving a 50% hedging on say a $25,000 investment? I understand the principles behind hedging but I would appreciate some guidance on the practical application.
One option being a direct investment on the New York Stock Exchange (NYSE) with US dollars (equivalent to $25,000 in Australian dollars) and the other option being a $25,000 investment in a US ETF (say IVV) on the ASX. I’ve heard of forward contracts and FX options but I’m not sure how these, or perhaps other strategies, could be applied to provide the appropriate level of hedging. Can you please share your thoughts?
Answer (Paul Rickard): On $25,000, hedging is going to be pretty difficult. You could look at FX options or FX forwards, however, you are going to run into two problems. These are:
a) notional contract size (too small for most banks to take you seriously); and
b) both are finite term hedges. At expiry, you have to roll them over.
A simpler alternative may be to look at the iShares S&P AUD Hedged ETF (IHVV) – the currency hedged version of the iShares Core S&P 500 ETF (IVV), which tracks the S&P 500.
If you are okay with the US market, and happy with a passive exposure through an ETF, to be 50% hedged:
a) buy $ 12,500 of IVV; and
b) buy $12,500 of IHVV.
Question: I would appreciate your view on the Qube entitlements offer at $2.05. Also, your view on the top up offer that lets you buy the same amount of new shares again at $2.05. The discount is only about 7% but Qube should be a better proposition after this new purchase, in my opinion. Closing date is 1 April, so any comments appreciated.
Answer (Paul Rickard): With Qube trading at around $2.31 and the Canadian Pension Plan Investment Board paying $2.14 for their shares, it is a no brainer to take them up at $2.05.
The question is: what you do then?
My inclination is that they have paid top dollar and that the synergy benefits may be more difficult to achieve. I would probably lighten off. Also, I wouldn’t count on getting too many shares under the top up offer, as the entitlement offer will be very heavily supported.
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