Question: We hold a number of unhedged exchange traded funds (ETFs) – predominately China, Japan, Europe and, to a lesser degree, the US. Many expect the Aussie dollar to drop much closer to 80 cents. How would this event affect our SMSF?
Answer (By Paul Rickard): Investment in China, Japan and Europe unhedged ETFs has two primary risks – the underlying stock markets (e.g. Nikkei for Japan), and the currency risk (back into Australian dollars – in the case of the Japanese ETF for example, the AUD/YEN cross rate).
In most cases, a fall in the AUD/USD to (say) 80 cents (1 AUD buys 0.80 USD) will be good for these ETFs, as the Aussie dollar should also weaken against these other currencies. It is probably not going to be 1:1, as the USD will tend to strengthen or weaken against all currencies. However, given the Aussie is widely considered to be over-valued, you would most likely expect it to fall in value as well against the YEN, Euro and Renminbi.
So, a fall in the Aussie dollar should, by and large, be a positive for these ETFs.
Question 2: I’ve been sent a brochure for Charter Hall’s Direct WorkZone Trust, an unlisted property syndicate investing in a newly-constructed A-grade office building located on the fringe of the Perth CBD. The major tenant is Leighton Contractors with a 12-year lease. The syndicate term is five years and aims to return around 9% per annum. My question concerns the long-term credit-worthiness of Leighton. Would you recommend investing in this syndicate?
Answer 2 (By Paul Rickard): I don’t know too much about the particular trust, however I would not be overly concerned about the tenancy risk.
The holding company (Leighton Holdings) is rated ‘investment grade’ by the major ratings companies (BBB for S&P, Baa2 for Moody’s), with the current ratings one notch above the minimum for investment grade. The holding company is under a little bit of pressure at the moment, with the market worried that the current gearing level of 39% may deteriorate.
The major tenant of the proposed fund is a subsidiary – and you should check whether the holding company specifically guarantees its obligations in this case. That said, Leighton Contractors is a well-regarded company and I wouldn’t be overly concerned.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances
