Insights
Foreign exchange hedging - calculation methodology

Our funds that invest in shares or bonds in other currencies all deploy varying levels of foreign currency hedging (or ‘FX hedging’ for short) to mitigate the risk (in other words, ups and down) that currency exposure brings to NZ dollar based investors . For example, our bond fund has a normal (or neutral) hedge position of 100% of its foreign currency exposure, while our global equities fund has a neutral target to hedge 50% of this risk. This hedging is executed using financial derivatives contracts (typically ‘forward’ currency contracts’). 

There are several ways to assess the impact of foreign currency hedging strategies in benchmark returns. Two of these are:

a) Applying a foreign currency return to a portion of the benchmark in line with the fund’s neutral hedge position . This is a simple, ‘proxy’ method. Pathfinder has historically used this simplified method to calculate the “neutral” hedging performance for several of its benchmarks. 

b) A comprehensive FX hedging benchmark methodology. This includes the impact of foreign currency forwards, unhedged gains/losses during a period (typically a month), and other minor timing factors. It typically assumes rebalancing on a monthly basis. This is the most common industry method, especially for larger fund managers. The benchmarks used for some of the Pathfinder Funds adopt this method, and from April 2026, the new benchmarks for the Global Responsibility Fund and Global Water Fund will also calculate hedging in this way.

Our investment team has assessed the quantitative impact of using a proxy FX hedging methodology by comparing it with estimates based on indices where comprehensive benchmark hedging data is available, or close proxies can be constructed.

The key findings are:

- Over longer time horizons (since inception or over five years or more), the difference between the proxy methodology and a comprehensive FX hedging  benchmark is small for all funds assessed, as summarised in the table below:

- Over shorter time periods, particularly for global multi‑currency funds, differences can be larger and can exceed 2% over a 12‑month period. Over this shorter time period, outcomes vary by fund and period, with the proxy return method sometimes producing higher and sometimes lower returns when compared to the comprehensive FX hedging returns.  For single‑currency or low‑volatility currency exposures (such as for the Ethical Trans‑Tasman Fund, which uses an Australian dollar‑based benchmarks), short‑term differences are typically minor.

In terms of our calculations, Pathfinder applied the ‘proxy’ method across four benchmarks up until 30 April 2026. After that date, we have moved to the comprehensive method for two additional benchmarks, as shown below.

Note that in Kiwisaver, the benchmarks Pathfinder uses continue to deploy the comprehensive method. 

For clarity, none of these methods have impacted the returns that Pathfinder has generated (and reported) in the Funds. 

Especially for funds that invest globally (in many foreign currencies), the comprehensive method is more appropriate. This is one reason why, after 30 April 2026, Pathfinder is now using a third-party index provider (Solactive) to provide us with hedged currency return data for our benchmarks for the Global Water Fund and Global Responsibility Fund.

For the Ethical Trans-Tasman fund and the Global Property Fund, Pathfinder will continue to apply the proxy method. The former reflects that, for various reasons4, short-term variation in the two methods for the ASX200 index is minor. For example, over a 12 month period, it is historically less than 0.5% in 19 of the past 20 years. 

We hope this helps you understand the meaning of “hedged” when you are looking at our benchmark description. We have also added a summary description of hedging calculations to our SIPO and will continue to disclose this in our Quarterly Fund Updates.

We appreciate this is a complex topic, so if you have any further questions or clarifications please get in touch.