12 April 2023
Financial awareness and skills are important factors of retirement confidence1. No matter how close or far you are from retirement, a bit of knowledge can go a long way. Here are 18 super investment terms to know.
Keep these terms in mind when you’re reading investment news and updates from your super fund or the media.
Understanding risk and how it’s managed
1. Investment risk
Investment risk is the possibility that an investment may fall in value or not meet return expectations.
Two key risks in a superannuation investment include:
- Volatility or market risk: the potential for investment losses due to asset price fluctuations in the market.
- Inflation risk: the general price increase of goods and services that happens over time, lowering the real value of money. A superannuation investment faces inflation risk if the return doesn’t exceed the rate of inflation.
2. Growth assets and defensive assets
Growth assets typically have more investment risk through market cycles, which means they may be more susceptible to volatility or investment losses. But they also have the potential for higher returns, providing you with the opportunity to grow the value of your portfolio, especially over the long term. Listed shares and private equity are examples of growth assets.
Defensive assets are historically more stable investments, with steadier returns over the long term. Fixed interest and cash are examples of defensive assets.
It’s worth noting that some assets have both growth and defensive characteristics, such as infrastructure and property. This is because they have a combination of both growth and income components.
3. Asset allocation
Asset allocation refers to how much we invest in each asset class. Well-diversified portfolios aim to provide a balance of defensive and growth assets.
Some examples of asset classes in an asset allocation mix include:
- fixed interest
AustralianSuper offers a range of PreMixed investment options which all have diversified portfolios, including the Balanced option, where most members are invested, and the Socially Aware option.
4. Market timing
Market timing refers to the buying and selling of investments based on predictions made from short-term price patterns, temporary market opportunities and judgements of underlying asset value. Market timing is extremely difficult to get right consistently, particularly for an individual investor. It’s a tactic used mostly for short-term investments.
AustralianSuper focusses on making longer-term investments and constructing a well-diversified portfolio to deliver on our purpose of helping members retire well.
A diversified portfolio invests in a mix of assets with different risk-return profiles. It’s a strategy which helps the AustralianSuper investment team control and minimise risk to investment returns.
An investor can diversify a portfolio in a number of different ways. You can diversify by investing in different companies within and across specific industries. You can also diversify by asset class, as we explained above under Asset Allocation. You can even diversify across geographies, by investing in assets from different countries.
A diversified portfolio can help reduce the overall risk to your retirement savings and provide you with more stable returns. This is particularly important during market downturns.
Types of investments
6. Unlisted assets
Unlisted assets are investments that aren't listed on public exchanges. They can include:
- property (large office buildings, shopping centres),
- infrastructure (roads, power grids and airports),
- private equity (investments in start-ups or existing private companies) and
- private credit (loans to companies).
While not as liquid (how easily you can convert it for cash) as some other asset classes, unlisted assets can be attractive long-term investments.
Historically, unlisted assets have played a crucial role in our construction of a well-balanced and diversified investment portfolio.
7. Listed assets
Listed assets are investments, such as company shares, listed and open for trade on a public exchange.
Examples of market exchanges include the:
- Australian Securities Exchange
- New York Stock Exchange
- Tokyo Stock Exchange
Listed assets are valued daily on their public market exchange, meaning they may be more affected by factors such as market sentiment, news developments and economic outlook.
8. Shares and dividends
Shares represent part-ownership of a company. Positive returns can be generated through the growth of a share’s price or through dividend income payments. Shares have relatively higher volatility because they are valued daily and because investor sentiment influences earnings and growth prospects.
Dividends are a payment made to shareholders from a company. The payment is a proportional share of the profits provided to shareholders.
9. Fixed interest
Fixed interest investments (also known as fixed income or bonds) include a broad range of securities issued by governments, companies and other organisations. Examples of this type of investment include treasury and corporate bonds. Positive returns can be generated through price appreciation and through interest income. Bond prices can be affected by changes in inflation, interest rates and credit quality.
Cash is an investment in money market securities issued by banks, certain companies or government entities. They can include deposits, bank bills and short-term bonds.
11. Liquidity of assets
Liquidity is the proportion of an investment portfolio that’s held in cash or can be easily converted into cash. For example, listed assets are considered more liquid than unlisted assets because they are traded on public exchanges, where they are valued and traded daily.
Calculating Government Age Pension entitlements
12. Deeming rates
The government uses deeming rates to assess income created from your financial assets. This is used to calculate payment rates for the Age Pension.
There is a high and a low deeming rate. The deeming rate used depends on the amount of financial assets you have, as well as other personal circumstances.
Your relevant financial assets can include:
- Savings accounts and term deposits;
- Managed investments, loans and debentures;
- Listed shares and securities;
- Some income streams; and
- Some gifts you make.
Learn more about deeming rates on the Services Australia website.
Calculating return on investment
13. Crediting rates
Crediting rates reflect the returns you earn on a superannuation investment. They’re used to calculate your account balance.
Crediting rates change based on movements in investment markets. Positive movements can increase your account balance and negative movements can reduce it.
Your balance is likely to change most days based on these movements and any transactions on your account. Crediting rates are shown net of all fees, costs and taxes related to managing the investment portfolio. Your estimated balance and earnings are calculated using crediting rates.
We credit your account with your actual earnings:
- at the end of the financial year,
- when you make a withdrawal or transfer out of AustralianSuper and
- when you change investment options (including into Member Direct).
A valuation is the price applied to an asset. The change in the valuation of assets in a portfolio is used to calculate the return of an investment.
15. ESG (environmental, social and governance)
The term ‘ESG’ represents these factors, which are important in evaluating and managing an investment:
- Environmental: Considers how a company acts in relation to the environment.
- Social: Considers how a company acts towards its employees, customers, suppliers and the community.
- Governance: Considers how a company operates and is managed, how its executive board is remunerated and its internal policies and culture.
At AustralianSuper, we believe companies with good ESG management provide better long-term returns.
16. Economic outlook
The economic outlook is a forecast of the performance of the economy. It’s often based on expectations of inflation, productivity, growth, employment and trade.
A recession is a contraction in the business cycle that occurs during a decline in economic activity. It’s often defined as two consecutive quarters of negative economic growth.
18. Market downturn
Market downturns occur when there is a decline in the prices of assets. This is a natural part of the market cycle, as asset prices go through periods of growth, decline and recovery.
Downturns may be defined as market corrections or bear markets:
- Market corrections are declines of 10% or more in the price of securities, generally over a relatively short period of time.
- Bear markets are declines of 20% or more in the price of securities, typically over an extended period of time.
Keep track of your super – download the AustralianSuper app
If you’re an AustralianSuper member, you can download our free app to help keep track of your super balance and insurance cover.
1. The 2022 AustralianSuper and Monash University Retirement Confidence Index