What are the risks of investing?

All investment activities incur risk. As well as considering the features of each Investment Option offered by Australian Enterprise Super, we believe it is important that you understand some common personal investment risk factors and the risks associated with the major asset classes into which each investment option may invest.

In general, for a higher potential return on your superannuation investment in AESuper, you will need to accept a greater level of risk. The degree to which you focus on growth or defensive assets when investing can affect both your personal investment risk factors and the degree to which asset class risk factors can affect the performance of your investment.

Personal Investment Risk Factors

Most superannuation investors should consider personal investment risk factors when assessing the risk profile of their super assets. The two most common personal investment risks factors are:

1. the risk of a negative return which may cause the value of your contribution accounts to decline over the short term
2. an 'opportunity' risk where the return on funds, though positive, may be less than what you need to achieve your personal investment objectives.

Asset Class Risk Factors

Generally, investments that are expected to provide higher returns over the long-term - usually investments with a higher proportion of growth assets (shares and property) - are considered to have more risk of a negative return in the short term. Returns may fluctuate, and the value of your investment may also move up and down over short periods.

Investments with a higher proportion of defensive assets (generally cash and fixed interest investments) will tend not to fluctuate as much in their value over shorter periods and there is generally less risk of a negative return. However, over the medium to long term, the returns from an investment with a high proportion of defensive assets can generally be less than the returns from an investment focussed on growth assets over the same period. This may have the effect of providing a lower return for you in the longer term.

The volatility of investment returns is influenced by the risk factors associated with the asset class to which the return relates. Risk factors that can affect the performance of an investment include the state of the world's economies, interest rates and inflation, consumer sentiment, company performance, exchange rate fluctuations, changes in the supply and demand for various investments and changes in government policies, taxation and laws.

Some of the common risk factors that relate to the asset classes into which AESuper's Investment Options invest are outlined below:

Cash

Inflation risk is the major risk for cash investments. If the interest rate applied to the cash investment is not at a level which at least matches the rate of inflation over the same period of time, there is a risk that the purchasing (or buying) power of your investment will reduce over time.

Fixed Interest

Interest rate fluctuations are the major source of risk for fixed interest investments. In general:

• falling interest rates can lead to an increase in the value of the underlying investment
• rising interest rates can lead to a decrease in the value of the underlying investment.

Typically, the longer the term of maturity of fixed interest investments, the greater a change in interest rates impacts on the value of the investment.

Property

Risks associated with property investments include supply and demand for the underlying properties which in turn affect the valuation of the property investments. Market sentiment, economic conditions and political events are factors which can impact on property supply and demand.

These factors may also influence the level of income achieved through rent and capital appreciation which in turn may affect the value of property investments. Property investments also face liquidity risks as the underlying properties can take a reasonable period of time to convert to cash (liquid assets) when sold. Such liquidity risks can affect the value of the investment from time to time.

Australian Shares

The risk factors for Australian shares include:

• performance of the industry in which a company (to which the share relates) operates
• performance of a company (to which the share relates) affected by the markets in which the company operates and changes in the company's financial position
• the size of the company - smaller companies (and their shares) tend to be more volatile than larger companies (and their shares)
• the Australian and international political and social environment
• a change in the overall performance of the sharemarket (market sentiment) and the liquidity of the shares.
  
  

Overseas Shares

By substituting the word "Australian" for "international" in the risk factors shown above for Australian Shares, the factors become equally applicable to overseas shares. In addition, for Australian investors, overseas shares are also affected by exposure to movements in currency exchange rates.

Managing the investment risks

Investment risk management - Members

As an investor there are a number of ways for you to manage investment risk. Adverse investment market movements can be offset to some degree by investing across a number of investment options (diversification) and by strategies such as making regular contributions (dollar cost averaging).

These two common strategies are simple to implement as part of your overall investment strategy.

Investment risk management - Trustee

The Trustee has developed investment strategies for AESuper which outline the broad processes used to manage the investment portfolio as a whole and the risks associated with the various asset classes into which AESuper's investment options invest.

The strategies for AESuper as a whole are:

• AESuper's assets are invested with professional investment managers;
• the Trustee reviews each investment manager regularly. This involves looking at their investment style, resources and organisational strength, and assessing whether their performance has met the Trustee's objectives. Each year, the Trustee also evaluates returns over the past three and five years;
• the investment managers have discretion to invest in a full range of assets, both Australian and overseas, including shares, property and fixed interest securities; and
• the Trustee allows the managers to use derivatives (such as futures and options contracts) for hedging purposes to protect AESuper against adverse movements in investment markets. Derivatives cannot be used for speculative purposes.

As well as the stated strategies above, a number of principals are embedded in the processes utilised by the Trustee when considering the management of AESuper's investments.

Where appropriate, the Trustee utilises diversification (investing with a number of different managers) with each manager having a complementary but not matching investment style to ensure a spread of investment risks. This assists in managing market risk typically associated with growth type assets.

The investment strategy for each Investment Option includes an asset allocation range for each asset class. This enables the Trustee to respond to market conditions by increasing or decreasing the assets allocated to a particular asset class as necessary without changing the underlying profile of the Investment Option. This assists in spreading and managing the risks for both growth and defensive type assets.

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© 2009 Australian Enterprise Super
 

The information contained on this website is of a general nature only and does not take into account your personal objectives, situation or needs. Before making a decision about Australian Enterprise Super, you should consider your own requirements and the relevant Product Disclosure Statement. To obtain a copy, call us on 1800 555 024 or download it from this website.

Professional Associations Superannuation Limited (PASL) (ABN 14 056 917 303 RSE L0000352 AFSL 222590) as Trustee of Professional Associations Superannuation Fund (PASF) (ABN 78 984 178 687 RSE R1000429). Australian Enterprise Super is a Division of PASF.