Vanguard Currency Overlay

Vanguard

Investment Style: Passive currency overlay

Vanguard Investments Australia Limited (Vanguard) is a wholly-owned subsidiary of The Vanguard Group, based in Valley Forge, Pennsylvania. The Vanguard Group, Inc. has a history of specialisation in public offer index management dating back to 1976. Vanguard Australia was incorporated in February 1996 to offer index management services to Australian investors, with investment management (excluding regional trading desks), operations and client servicing located in Melbourne.

Vanguard employs an optimisation process which allows the highly-efficient management of change, both index change and portfolio cashflows. The firm's view is that optimisation should result in low tracking error with superior after-cost returns than full replication. Vanguard strongly believes that the minimisation of costs is critical to success in managing passive portfolios. Optimisation of structure allows for the avoidance of the high costs associated with many small trades as well as working around the non-availability of assets and minimum transaction sizes.

Vanguard uses an internal proprietary currency hedging system that employs an optimisation approach aimed at minimising required currency trades. The fund manager uses proxy currencies heavily to avoid trading in currencies with wide underlying interest rate spreads or differentials against the Australian dollar.

Vanguard trades in only six major currencies, relying on the high correlation of the chosen proxy currency with the local currency to control the overall tracking error of the portfolio against the fully-hedged benchmark. Hedging is undertaken by way of currency forward contracts.

Vanguard Australia’s investment team is led by Joseph Brennan as Chief Investment Officer. The team operates in four divisions: Equities, Fixed Interest, Investment Solutions & Research, and Investment Risk. International and Australian fixed interest and currency management is the responsibility of the Fixed Interest team led by Roger McIntosh (Head of Fixed Interest).