Understanding investments and risk

The least risky of all asset classes, cash is often chosen by investors who want to access their money in the short to medium term.

The chances of negative returns from cash investments are much lower than other asset classes, however the expected returns are also lower. There is also a chance that the buying power of your money is reduced because it may not keep up with inflation.

The value of a cash investment will fluctuate due to a number of factors, primarily with the rises and falls in interest rates.

All of our pre-mixed investment options include an allocation to cash, and members can also invest exclusively in cash by selecting our Cash single asset class option.

A fixed income investment is a loan to a government, semi-government authority or large corporate in exchange for regular interest payments, plus repayment of the principal amount at maturity.

Interest is paid to investors over the life of the investment, usually at a fixed rate. However, for some bonds, the interest payments and/or principal are adjusted for the rate of inflation. These are known as ‘inflation-linked bonds’ and they are designed to help protect investors from inflation.

While fixed income investments such as bonds are usually less volatile than many other investments such as shares, they also have a lower expected return over the long term.

It is important to note that fixed income investments are not without risk and do not provide a fixed rate of return like a term deposit. Bonds are traded in a marketplace with buyers and sellers like many other investment types which means they are exposed to price movements, and the possibility exists for low or negative returns from time to time.

Bond values are driven by prevailing interest rates and expected interest rate movements. In general, when interest rates rise, the market value of bonds tends to fall, and when interest rates fall, bond values tend to rise. This can have a significant impact on performance.

All of our pre-mixed investment options include fixed income investments, other than High Growth, and we also offer Australian Fixed Interest and International Fixed Interest single asset class options.

Our international fixed income investments are 100% hedged, meaning they are protected against the impact of currency fluctuations on investment returns.

Equities or shares are a portion or share of a company that can be bought or sold on an exchange. Via equity investments, investors can access both large and small companies across a range of industries in Australia and overseas.

The return investors receive from investing in equities can be via capital gains (and losses), as well as income in the form of dividend payments.

Over the long term, returns from equities tend to be higher than those achieved by property, fixed income and cash investments. But in the short term, their performance is more volatile and returns can be negative, making shares a higher risk investment.

Various factors like consumer sentiment, commodity prices and company performance can all have an impact on the value of daily share prices.

All of our pre-mixed investment options include Australian and international equity investments, and we also offer the below single asset class options:

• Australian Equities – passively managed by an index-replicating manager.
• International Equities - managed by an index-replicating manager - note that this option is unhedged, and as such, will fluctuate both as a result of changes in the value of the underlying shares and currency movements.
• Australian Equities Socially Responsible Investment (SRI) – this option invests in companies that meet specific criteria with respect to environmental, social and governance considerations. You can read more about the investment selection process and criteria here.

A list of our top shareholdings is available here.

Property

Property investments include investments in office buildings, shopping centres and industrial estates, as well as residential property such as apartment buildings and retirement villages. Investors can access property investments either directly or indirectly by purchasing units in a property trust (unlisted or listed).

Returns from property investments reflect a combination of rental income and capital growth and are dependent on a range of economic factors, such as interest rates and employment, as well as the location and quality of properties.

Property investments are subject to a moderate to high degree of risk and are most suitable for long term investors seeking high growth over the medium to long term, who are willing to accept fluctuations in returns and the possibility of negative returns over the short term.

At Aware Super we invest in a combination of unlisted and listed property assets which are traded on stock exchanges globally.

All of our pre-mixed investment options include an allocation to both Australian and global property investments, and we also offer a single asset class Property option.

Infrastructure

Infrastructure assets are the utilities and facilities that provide essential services to communities. Examples include utilities (electricity, gas, water and communications), power (including renewables), transport (airports, seaports, toll roads and rail) and social infrastructure assets (hospitals, education facilities and community infrastructure such as a convention centre). New infrastructure sub-sectors which exhibit similar features to traditional infrastructure investments, for example land title registries, have also developed over time.

Due to their scale and importance, infrastructure investments typically have high barriers to entry, but offer investors a steady income stream, potential for capital growth over the long term, and lower volatility than other growth assets such as equities. However, they are not risk-free. For example, changes to government regulation, usage volumes, and rising or falling interest rates, can all have an impact on their value.

Similar to property, investors can access infrastructure investments via direct investments in individual assets, or indirectly via unlisted or listed pooled funds. All of our pre-mixed investment options include infrastructure investments which reflect a combination of direct and indirect unlisted assets.

Credit income

Credit income covers a range of alternative debt investments. Like fixed income, credit income investments involve a loan to a borrower in exchange for regular interest payments, plus repayment of the principal amount at maturity. However, compared to traditional fixed income investments the loans are typically to borrowers with a lower credit rating and, as a result, command a higher rate of return to compensate the investor for the risk of default. Examples of credit investments include loans to unlisted infrastructure and real estate companies.

Our Growth, Balanced Growth and Conservative Growth pre-mixed investment options include an allocation to credit income investments.

Private Equity

Private equity offers investors an opportunity to invest in companies, both in Australia and abroad, that are not listed on a stock exchange.

Such companies can include large established companies needing investment and expertise to support future growth plans, as well as smaller, rapidly growing businesses at various stages of development.

Compared to listed equity markets, the private equity market is less efficient and less regulated, which creates opportunities for skilled managers to add value. However, private equity investments are typically illiquid, higher risk investments and so are best suited to investors with a medium to long-term investment horizon.

Except for the Diversified Socially Responsible Investment option, all of our pre-mixed investment options include an allocation to private equity investments.

Other alternatives

Real return strategies and hedge funds

Unlike traditional fund managers which are often restricted to investing in a single asset class (e.g. Australian equities), managers of real return strategies (known as ‘dynamic-multi asset’ managers) and hedge funds, have a wider range of allowable investments and are able to utilise a combination of equities, bonds, currencies, commodities and other liquid asset classes.

They can make investments in these asset classes via physical exposures or through the use of derivatives.

These managers aim to deliver returns above CPI or an official cash rate by dynamically moving around their exposure to the various asset classes.

SRI alternative strategies

SRI alternative strategies include both hedge funds and real return funds (described above), where the investment strategy is compliant with our guidelines for the Diversified SRI option, in addition to private market investments.

These private market investments may be in a single asset class, where the investment is expected to contribute positively to the environment or to society, while delivering an expected rate of return commensurate with the risk of the investment.

Examples include investments in renewable energy assets and private equity investments which aim to generate employment or other social benefits.