Super Funds: Where Your Money Is Invested

Superannuation is one of the largest investments you will ever make, so it's important to understand how your super fund invests your money. Your super fund makes investment decisions to grow your money beyond what you contribute, and the options you choose can make a big difference to how your super grows. There are a wide variety of investment options available, from conservative to growth, and your fund will typically move your money from growth investments when you're younger to more conservative investments when you're older. You can choose from a range of investment options, including managed funds, listed equities, term deposits, bank accounts, and shares. Your super fund will typically have a team of experts working to manage investments for members, focusing on longer-term strategies to meet the investment objectives of the fund.

Defensive assets vs growth assets

Defensive assets and growth assets are two types of asset classes that super funds invest in. Asset classes are groups of investments with similar characteristics and are the building blocks of investment options. Defensive assets typically generate lower returns over the long term and are less volatile than growth assets. They usually consist of cash and fixed-interest investments, providing stable but modest returns. On the other hand, growth assets focus on shares and property, aiming for higher returns but with higher risk and volatility.

Defensive assets are considered more conservative and stable, often chosen by those closer to retirement to reduce the risk of significant losses. They are less likely to experience steep declines during market downturns, providing a safer option for investors. However, defensive assets may not keep up with inflation over time, resulting in lower overall returns compared to growth assets.

Growth assets, in contrast, are more aggressive and aim for higher returns over the long term. They are more common among younger investors who are willing to take on higher risk to maximise their superannuation funds. While growth assets can lead to steeper losses during market downturns, historically, there have been more ups than downs over time, favouring this option.

Super funds often offer a mix of defensive and growth assets, known as a "balanced" or "diversified" approach. This strategy aims to balance risk and return, providing stable yet reasonably high returns. The specific mix of defensive and growth assets depends on the investor's risk tolerance, age, income, and other factors. Some funds also allow investors to choose their asset allocation, customising it to their risk tolerance and investment goals.

It's important to note that the performance of defensive and growth assets can vary over time, and historical trends may not always predict future outcomes. Investors should carefully consider their financial goals, risk tolerance, and time horizon when deciding between defensive and growth assets or a combination of both.

Diversification

Super funds, with the goal of maximising returns and securing members' financial futures, adopt diversification strategies to protect their members' money. They aim to construct a "well-diversified portfolio" that gains from rising markets and safeguards wealth during downturns.

Secondly, super funds also diversify within asset classes by investing in different sectors within them. For example, they may select a range of countries and regions within the asset class of property, such as Australian, European, and US real estate. This approach helps protect against the risk of a single share, bond, or property losing value.

Additionally, super funds use a combination of listed and unlisted investments, active and passive management, and different investment managers and styles to build a robust portfolio. They may also employ techniques like dollar-cost averaging, where they invest in an asset class over time to smooth out market volatility.

The benefits of diversification are significant. By spreading investments, super funds aim to achieve a smoother stream of investment returns and avoid substantial losses. Diversification helps to buffer against downturns in the market, as ideally, the gains from some assets will offset the losses from others.

It's important to note that diversification is not just for super funds. Individuals can also apply these principles to their superannuation and other investments. This includes spreading investments across a wide range of asset classes, diversifying within asset classes, and using different investment approaches.

Risk tolerance

An investor's risk tolerance is influenced by factors such as age, investment goals, income, and future earning capacity. For example, a younger investor may have a higher risk tolerance as they have a longer time horizon for their investments to grow and can afford to take on more risk. On the other hand, someone closer to retirement age may have a lower risk tolerance and opt for more conservative investments to protect their capital.

Aggressive investors, or those with a high-risk tolerance, are willing to risk losing money in pursuit of potentially better results. They tend to emphasise capital appreciation and have a higher allocation of stocks in their portfolios. In contrast, conservative investors seek investments with guaranteed returns and are willing to accept little to no volatility in their portfolios. They typically invest in lower-risk assets such as cash, term deposits, fixed-interest accounts, and government bonds.

It's important to note that all investments carry some level of risk, and understanding your risk tolerance can help you make informed decisions about your super fund investments. The Standard Risk Measure (SRM) is a tool used in the super industry to help investors compare the risk levels of different investment options. It describes the level of risk for each investment option as the estimated number of negative annual returns over any 20-year period.

Additionally, diversification can help manage investment risk. By spreading your investments across different types of assets, industries, and geographic locations, you can reduce the impact of volatility within a single asset class and lower the overall risk of your portfolio.

Investment options

Super funds typically have a team of experts working to manage investments for members. They focus on longer-term strategies to meet the investment objectives of the fund. This could mean investing in infrastructure projects with long lead times, such as airports and toll roads, or innovative companies with good prospects, like Netflix or Amazon. It could also include companies in promising fields such as renewable energy and medical research.

Broadly speaking, the first category or class of assets can be described as growth assets, including shares and property. These are likely to experience greater fluctuations in value, which can lead to negative returns. However, they also have the potential to generate higher returns in the long term compared to defensive assets.

Then there are defensive assets such as term deposits and fixed-interest investments, including government and corporate bonds. These can be relatively inexpensive and provide more modest returns at lower levels of risk.

Super funds either invest in specific classes or diversify their portfolios. Generally, an approach of spreading risk is better. That way, your portfolio doesn't hinge on a specific asset class – for example, a property market collapse or a rise in interest rates devaluing your bond holdings.

• Conservative: This option typically comprises mainly 30% in shares and property, with the remainder in defensive assets such as cash and fixed interest.
• Balanced: This option aims for a reasonable return, with around 70% in shares and property and 30% in cash and fixed interest. It usually involves diversifying across a broad range of investments, including Australian and international shares, cash, property, infrastructure, and bonds.
• Growth: This option aims for high returns in the long term, with around 80-85% of investments within high-growth asset classes, such as shares and property. There is minimal investment in defensive assets, resulting in a higher risk of loss but also the potential for greater returns.
• Cash: A cash investment approach means investing in deposits with Australian banks. As cash is a defensive asset, a 100% cash approach will generate stable returns but may not provide the long-term growth of other assets. It is typically the least risky of all asset classes.
• Pre-mixed: Pre-mixed investment options offer a diversified mix of assets, typically including shares, property, fixed interest, and cash. The specific allocation of each asset class will depend on the fund and the chosen investment strategy, which can range from conservative to growth.
• Choose-your-own: Some super funds allow individuals to choose the mix of different asset types or make direct investments. This is known as a 'choice' super product. For example, one might favour international over Australian shares and allocate their funds accordingly.

Returns

Super funds typically offer a range of investment options, from conservative to growth, and your choice will depend on your risk tolerance and financial goals. A conservative approach will see your super fund invest mainly in defensive assets such as cash and fixed interest, which provide more stable but modest returns. On the other hand, a growth strategy aims for higher returns by investing in growth assets such as shares and property, which can experience greater fluctuations in value, including negative returns.

The length of your investment timeframe can also impact your returns. If you're investing for the long term, you may be able to withstand short-term losses in pursuit of higher returns over time. Conversely, if you're approaching retirement, you may opt for more conservative investments to preserve your portfolio and reduce the risk of losses.

It's important to remember that historical performance does not guarantee future results, and the investment option that's best for you depends on your individual circumstances and risk appetite. Diversifying your investments across a range of asset classes, sectors, and industries can help to mitigate risk and improve the likelihood of achieving your retirement goals.

Additionally, the size and scale of a super fund can impact its ability to generate returns. Larger funds may have access to opportunities not available to smaller funds, such as investing in large unlisted assets or allocating funds to different asset classes without selling long-term investments, which can benefit members' returns.

Frequently asked questions