With global events leading to market shifts and changes, adding to your knowledge of investment terms may help you feel more confident.
Keep these terms in mind when you’re reading investment news and updates from your super fund or the media.
Common investment terms you need to know
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 extent to which the return on an asset fluctuates over time.
- Inflation: Inflation is the general increase in the price of goods and services that happens over time, which has the effect of lowering the 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 lose value. 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.
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 is the diversification among different types of securities in a portfolio to provide a balance of defensive and growth assets. Some examples of asset types in an asset allocation mix include shares, fixed interest, cash, infrastructure and property. AustralianSuper offers a range of PreMixed investment options which all have diversified portfolios, including the Balanced option, which over 80% of members are in1, and the Socially Aware option.
4. Market timing
Market timing refers to the buying and selling of stocks on the basis of shorter-term price patterns and temporary market opportunities, as well as 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 focuses on long term investments and building a diversified portfolio to deliver members with the best chance of promising returns.*
A diversified portfolio has a mix of assets, across different classes and is a strategy which helps the AustralianSuper investment team control and minimise risk to investment returns.
Types of asset classes used in AustralianSuper investment options include Australian shares, international shares, private equity, infrastructure, property, credit, fixed interest and cash. These investments are used to create diversified portfolios which 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 investment
6. Unlisted assets
Unlisted assets are investments that are not listed on the stock exchange. 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 as some other asset classes, unlisted assets have proven to be solid long-term investments in the past.
At AustralianSuper, we’ve included unlisted assets among our investments for many years, as these assets perform a valuable role in ensuring the Fund has a well-balanced and diversified investment portfolio.
7. Listed assets (TOI)
Listed assets are investments that are listed on the stock exchange. They include company shares that are traded on market exchanges such as the Australian Securities Exchange, New York Stock Exchange, NASDAQ and Tokyo Stock Exchange.
These investments are valued daily by the stock exchange, which means that listed assets are affected by factors such as market sentiment, future developments and economic outlook.
8. Shares and dividends
Shares: Shares represent a part-ownership in a company, with returns generated through the growth of the share price and dividend income. Shares can have high volatility as share prices are based on earnings and growth prospects for a company and can be influenced by investor sentiment.
Dividends: A payment made to shareholders from a company. The payment is a proportional share of profits provided to shareholders.
9. Fixed interest
Fixed interest investments cover a broad range of securities issued by governments, companies and other organisations. Examples of this type of investment include treasury and corporate bonds. Returns are based on interest income and bond prices can be affected by changes in inflation, interest rates and credit quality.
Cash is an investment in money market securities such as deposits, bank bills and short-term bonds issued by banks, some companies and government entities.
11. Liquidity of assets
Liquidity refers to the ease with which an investment can be converted into cash. It can be used to describe the proportion of a portfolio held in cash, or in investments that can readily be sold to raise cash, such as listed shares and fixed interest.
Calculating Government Age Pension entitlements
12. Deeming rates
The deeming rate is the amount of investment income that assets are assumed to earn, for the purpose of calculating the Government age pension. Deemed income is added to other income and used for the income test to calculate payment rates for Age Pension.
The rate is arrived at through a simple and fair set of rules used by the government to assess the income created from your financial assets. Deeming rates ensure that all financial investments are assessed and treated in the same way and are set by the Minister for Social Services. The rates reflect expert advice on what the markets are doing.
Some of these financial assets include:
- Savings accounts and term deposits
- Managed investments, loans and debentures
- Listed shares and securities
- Some income streams
- Some gifts you make
Calculating return on investment
13. Crediting rates
Crediting rates reflect the returns earned on a superannuation investment and are used to calculate your account balance.
Crediting rates change based on movements in investment markets and can increase your account balance if they are positive or reduce it if they are negative. Your balance is likely to change most days based on these movements and any transactions on your account. Crediting rates are net of fees and tax, so they’re shown after all fees and taxes related to managing the investment portfolio have been taken out.
Crediting rates are included in your estimated balance and earnings when you log into your account. Your actual earnings will be credited to your account:
- at the end of the financial year
- when you make a withdrawal or transfer out of AustralianSuper
- when you change investment options (including into Member Direct).
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 factors that are important in evaluating and managing an investment.
- Environmental: Looks at how a company acts in relation to the environment
- Social: Considers how a company acts towards its employees, customers, suppliers and the community
- Governance: Looks at how a company operates, its leadership and how its executive board is run, and what its internal policies and culture look like
At AustralianSuper, ESG is an integral part of how we invest. We believe that investing in companies with good ESG management provides better long-term returns for our members.
16. Economic outlook
The economic outlook is a forecast of the performance of the economy 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 is frequently 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. Market downturns are a natural part of the market cycle as asset prices go through periods of growth, decline and recovery.
Type of market downturns can include 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 the free AustralianSuper app to help keep track of your super balance, your insurance limits and make sure your super contributions are being paid.
Source 1. AustralianSuper data, March 2020