When reviewing your super, it helps to understand how it’s invested – and how investing in asset classes can help grow and protect your retirement savings.
Investing in options
Your super is pooled with other members' super in one or more investment options. Your investment option(s) holds a range of investments and strikes a daily unit price. The unit price reflects the net value of the option’s investments at a particular date.
The change in your option’s unit price (up or down) from period X to period Y is your investment return. This is normally expressed as a percentage. A positive return is a capital gain while a negative return is a capital loss. Your investment risk is the chance that your option’s actual return will be different from the expected return, that the return could be negative, and how much the option returns fluctuate over time.
Investing in asset classes
Your option’s investments can be grouped into asset classes. Traditional asset classes include equities (shares), fixed income (bonds), property, and cash. Non-traditional asset classes include infrastructure & real assets (e.g., toll roads, airports and wind farms), private equity (unlisted companies), and alternatives (investments that fall outside these groups).
Importantly, asset classes differ in terms of how much they can return and how risky they are. Equities, for instance, are usually a higher return/higher risk asset class. Bonds are usually a low to moderate risk/low to moderate return asset class. Cash is typically a low return/low-risk asset class.
Asset classes can also differ in terms of liquidity (how easily they’re bought or sold), structure (listed or direct investments), how they're managed (active or passive, covered later), and whether they’re traded on a public exchange like the ASX as with shares or held privately as with private equity.
Asset classes can also be classified as ‘growth’ or 'defensive'. Growth assets like shares or property typically deliver capital growth and some income over time. Defensive or income assets like fixed interest and cash typically deliver income and some capital growth over time.
In the chart below we compare growth and defensive asset classes by their potential return and potential risk. The chart shows how cash, as a defensive asset class with low potential return and low expected risk, is so different from say shares/equities, which as a growth asset class has a higher potential return albeit a higher expected risk. Alternatives can include growth assets and riskier investments like hedge funds, as well as defensive, less risky assets like fixed income alternatives.
Combining asset classes in a portfolio
Asset classes can be combined in a diversified portfolio like the Aware Super High Growth or Growth options. A diversified portfolio usually contains a mix of growth and defensive asset classes, as we show in the chart below. Diversifying across asset classes can help reduce the risk of loss for the portfolio if one asset class performs poorly.
An asset class can be represented as a single asset class portfolio like the Aware Super Australian Equities option. Although a single asset class, this option is still well-diversified because it holds a wide range of stocks that differ by risk, return, sector/industry, dividends, etc.
Strategic and tactical asset allocation
Asset classes in a diversified investment portfolio can be managed on a long-term ‘strategic’ basis or on a shorter-term ‘active’ basis.
Strategic asset allocation (SAA) is where long-term target allocations are assigned for each asset class in a diversified portfolio with set investment ranges for each asset class. For example, Australian Equities may have an SAA of 30% with an investment range of say 25-45% around this 30% target. The aim of SAA is to manage portfolio returns and risk over the long term.
Active asset allocation is where shorter-term targets are set for each asset class above, at, or below their long-term target (SAA) allocations. For example, an active allocation to Australian Equities of 35% would be a 5% overweight position because its long-term strategic target weighting (SAA) is 30%. An active allocation of 25% would be a 5% underweight position. The aim of active asset allocation is to deliver a higher investment return than the market return (e.g., for Australian Equities, the ASX 200) over a certain period while managing investment risk.
How does Aware Super grow your wealth?
At Aware Super, we take a ‘Responsible Ownership’ approach to managing your super investments. This approach is underpinned by 1) our focus on delivering strong long-term investment returns above inflation; 2) our belief that active asset allocation can add value in an investment portfolio; 3) that investing as a ‘force for good’ helps improve outcomes for our community and environment.
Our Responsible Ownership approach is underpinned by some additional investment beliefs:
- Robust and transparent investment practices make a difference.
- Being a responsible owner adds value. A long-term mindset is an advantage.
- Scale advantages can help reduce costs and increase the range of investment opportunities.
How we manage your investments
If you’re unsure which option is right for you, you can get simple financial advice, either over the phone or face-to-face, by booking an advice appointment with us.
This is general information only and does not take into account your specific objectives, financial situation or needs. Seek professional financial advice, consider your own circumstances and read our product disclosure statement before making a decision about Aware Super. Call us or visit our website for a copy. Issued by Aware Super Pty Ltd ABN 11 118 202 672, AFSL 293340, the trustee of Aware Super ABN 53 226 460 365. Financial planning services are provided by our wholly owned financial planning business Aware Financial Services Australia Limited, ABN 86 003 742 756, AFSL No. 238430. Please click on the links to the general advice warning and conditions of use for this website