Our investment options are made up of different combinations of asset classes. Understanding their characteristics can help you make wise investment decisions when it comes to your super or pension.
About asset classes
An asset class is a specific category of assets or investments, such as cash, fixed interest, property, alternative investments and shares.
These investments fall into two broad asset classes – growth and defensive.
Growth assets
Growth assets are designed to grow your investment.
They include investments such as shares, alternative investments and property. They tend to carry higher levels of risk, yet have the potential to deliver higher returns over longer investment time frames.
In general, growth assets are expected to provide returns in the form of capital growth. For example, as a shareholder, you may receive income in the form of a dividend on the shares you own. However, the majority of the return usually comes from changes in the value of the company over time, as determined by its share price.
This increase or decrease in a company’s value is known as capital growth or capital loss. These returns can be strongly influenced by market fluctuations and can, therefore, vary considerably over shorter time frames.
The frequent changes in a company’s value is known as volatility and it’s because of this volatility that growth assets are considered higher risk investments, especially over shorter time periods of one to three years.
Defensive assets
Defensive assets include investments such as cash and fixed interest. They tend to carry lower risk levels and, therefore, are more likely to generate lower levels of return over the long term.
Generally, defensive assets are expected to provide returns in the form of income.
ASSET CLASS RISK AND RETURN CHARACTERISTICS
Asset classes have particular risk and return characteristics.
Growth assets
Generally higher risk with higher return potential
Defensive assets
Generally lower risk with lower return potential
Asset class characteristics
Type of investment
|
Source of investment return |
Potential to go up and down in value |
| Growth Assets |
Shares
- Securities that represent ownership in a company.
|
- Returns come from increases or decreases in value.
- Returns also come from income from the company’s profits which are paid to shareholders as dividends.
|
- Potentially earn the highest return over the long term.
- Value more likely to fluctuate in the short term.
- Considered a high-risk investment.
|
Alternative investments
- Infrastructure, such as roads and airports.
- Private equity investments.
|
- Returns come from increases or decreases in value.
- Returns also come from income.
|
- Potentially earn more than property, fixed interest and cash over the long term.
- Value tends to fluctuate more than property, fixed interest and cash in the short term.
- Considered a medium-to-high risk investment.
|
Property
- Industrial, retail or commercial real estate.
- Unlisted property funds.
- Listed property trusts.
|
- Returns come from increases or decreases in value.
- Returns also come from income in the form of rent.
- Returns from listed property are linked to movements in the value of the securities and income generated by the property management companies.
|
- Potentially earn more than fixed interest and cash over the long term, but less than shares.
- Value tends to fluctuate more than fixed interest and cash but not shares, over time.
|
| Defensive assets |
Cash
- Money in bank deposits.
- Money in short-term money market securities.
|
- Returns come from interest paid on the amount invested.
- Returns also come from increases or decreases in value of the underlying securities due to changing interest rates.
|
- Chance of losing money on a cash investment considered remote over a one-year period, but possible.
- Generally a stable investment that provides steady returns.
- Value tends to fluctuate due to changing interest rates.
- Returns tend to be lowest of all asset classes over time.
- Short-term money market securities can increase or decrease in value over time, unlike money in bank deposits.
|
Fixed interest
|
- Returns come from interest paid on the loan amount. (When buying fixed-interest securities, investors are ‘loaning’ money to a corporation or government at an interest rate.)
- Returns also come from increases or decreases in value of the underlying securities due to changing interest rates.
|
- Tend to provide better returns than cash over the long term, but lower returns than property and shares.
- Value tends to fluctuate more than cash but less than property and shares.
|
Shares
Publicly listed companies sell shares to external investors. When you buy a share, you buy part of a company and this allows you to participate in that company’s profits via share price growth and/or dividend payments. As a company grows, it re-invests all or part of its profits back into the company, which can result in the price of the company increasing as the profits of the company increase.
If the company doesn’t re-invest in itself, the profits can be shared with its investors through a dividend payment, which is where profits are distributed directly to shareholders in proportion to the shares held. Some companies do a combination of both.
Shares potentially earn the highest returns over the long term, but are more likely to fluctuate in the short term which makes shares a higher risk investment.
UniSuper invests in both Australian and international shares which are listed on a range of exchanges, such as the Australian Stock Exchange and the New York Stock Exchange.
Alternative investments
Alternative investments typically constitute investments made in unlisted companies (as opposed to those that are publicly listed on stock exchanges).
Such investments can be made directly (e.g. a direct equity interest in such a company) or through an investment manager.
UniSuper’s alternative investments are generally invested in the infrastructure and private equity asset classes.
Infrastructure
Infrastructure comprises physical assets and related operations providing businesses and society with essential services that facilitate many important activities and are diversified across a range of sectors including:
- transportation (including airports and toll roads)
- utilities (such as water and energy), and
- natural resources (including timber and mining).
Investments within these sectors are further diversified by selecting assets in different geographic locations and by investing at various stages through a particular asset’s life cycle, consisting of the construction, growth and mature stages.
Unlisted infrastructure investments potentially provide investors with stable, long-term capital growth and cash distributions.
The infrastructure portfolio is comprised of a range of investments, some of which are managed directly by UniSuper and others that are managed by external fund managers.
Private equity
The private equity portfolio comprises investments in unlisted companies held through a number of Australian and international private equity funds.
Investments are diversified across a broad range of sectors including:
- venture capital (funds for start-up firms, small businesses and specialised projects with growth potential)
- expansion capital (funds for more mature enterprises looking to expand or restructure), and
- buy-outs.
UniSuper’s private equity investments are also diversified across regions and countries, including Australia, the United States, Europe and Asia Pacific. UniSuper generally holds these investments through underlying private equity funds as a limited partner.
Property
Property investments are investments in land and the facilities on it. They fall in to two categories - unlisted property and listed property.
Unlisted property
Unlisted property typically comprises investments in high-quality, professionally managed retail, office or industrial real estate with a focus on producing returns from both rental income and capital growth.
Given unlisted property doesn’t trade on stock markets, prices are determined by an independent valuation process.
Over the long term, property returns are potentially higher than fixed interest or cash, but less than shares. Rental income is generally a significant component of property returns, which tends to enhance the stability of returns.
As property is a real asset, it has inherent inflation protection characteristics. In an investment portfolio, property can diversify investment risk due to its low correlation to other asset classes, such as shares and fixed interest.
UniSuper’s unlisted property portfolio, located almost entirely in Australia, focuses on high quality, core real estate in primary markets.
Listed property
Like unlisted property, listed property allows investors to purchase interests in a diversified and professionally managed portfolio of real estate across the commercial, industrial and retail sectors, with a focus on producing returns from both rental income and capital growth.
Our listed property investments are investments in property trusts, which are listed on a publicly traded stock exchange. As such, pricing is based on market movements as interests are listed and traded on stock markets, as opposed to underlying asset valuations.
UniSuper’s listed property portfolio includes Australian and internationally listed property securities.
Cash
Cash investments include money in bank deposits or in short-term money market securities.
The investment returns largely come from interest paid on the amount invested as well as any increase, or decrease, in the case of negative returns, in the value of the underlying securities due to changing interest rates.
Short-term money market securities are different from bank deposits and can increase or decrease in value.
Fixed interest
Fixed-interest investments include securities such as bonds and debentures.
In buying fixed-interest securities, the investor is effectively lending money to a corporation or government.
The returns arise from the interest paid on this ‘loan’ as well as any increase, or decrease, in the case of negative returns, in the value of the underlying securities primarily due to changing interest rates.
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