Asset classes within income streams
May 2020
All investments are built on simple elements known as asset classes. It is the mix of specific asset classes that determines the characteristics of any investment options or choices and the overall portfolio.
Assets are generally defensive or growth assets and the proportions of each impacts on the risk and returns to be expected from any investment.
| Asset class categories | ||||
|---|---|---|---|---|
| Defensive assets Defend from capital losses |
Cash, Bonds | Less likely to fluctuate over short term | Provide lower returns over long term | |
| Growth assets Grow investment |
Real assets, Shares | More likely to fluctuate over short term | Provide higher returns over long term | |
| Other Provide additional returns |
Alternatives, Private markets | Risk and return characteristics of both growth and defensive assets can be found in investments in this category | ||
- Return
- Investment returns are the change in value of an investment during a period. Returns can be positive (increased value) or negative (decreased value).
- Risk
- Investment risk refers to the chances that the value of your investment may not continuously accumulate, and may even fall in value.
- Volatility
- Volatility refers to the changes in the returns of an investment between periods. Volatility reflects both the scale of the difference between an investment’s highest and lowest returns, as well as the period between those peak values. The returns of the most volatile investments can vary a lot and frequently. The least volatile investments yield almost identical returns across any timeframe.
For investment choices, these concepts (return, risk and volatility) are the guiding lights, best viewed in relative terms to compare available investments and investment needs.
Though the future of any investment is uncertain, history shows us trends to help in locating higher or lower returns, attracting higher or lower risks, and enduring greater or lesser volatility.
See Understanding AvSuper’s asset classes for more.
The main asset classes
Cash
Cash investments in superannuation funds refers to short term interest bearing investments, such as term deposits. Cash is a defensive asset, as it maintains the principal value but has relatively low returns.
Time frame- Short. Less than one year.
- Key advantage
- Provides immediate access to investment/savings.
Fixed interest
Also known as bonds, fixed interest investments are issued by governments and companies as a means of raising money. The principal has to be repaid by a certain date, and set interest payments are paid along the way. Interest rates can affect the value of fixed interest investments with the potential for capital growth.
Time frame- Short to medium. Three to five years.
- Key advantage
- May counterbalance growth assets, as prices tend to move in the opposite direction.
Real assets
Real assets include investments in both Property and Infrastructure.
Property investments in super include residential property which is a popular form of investment in Australia. However, super funds will usually also invest in a mix of commercial, industrial and retail property, together with infrastructure such as airports, ports and roads. This asset class is classified as a growth asset and has traditionally returned well but the returns tend to be lower than those provided by shares.
Time frame- Short to medium. Three to five years.
- Key advantage
- This growth asset can diversify a portfolio with returns derived from rent and capital growth.
Shares
Shares effectively give you some ownership in a company. This means that you are buying the right to share in the company’s future financial performance – whether good or bad. Shares have historically delivered the highest return over the long term but can be very volatile as most investors learnt through the global financial crisis.
Time frame- Long. More than five years.
- Key advantage
- This growth asset can diversify a portfolio with returns derived from dividend income and capital growth.
Alternatives & Private markets
Alternative assets are not traditionally included for institutional investments. They include hedge funds, private equity (unlisted companies), high-yield bonds and emerging markets. These two sectors cover a range of risk and return profiles and show mixed characteristics of growth and defensive assets.
Time frame- Medium to long. More than three years.
- Key advantage
- Alternative assets can reduce volatility in a diversified portfolio as value and returns don’t necessarily follow other investment trends.
Managing investment risk
To some extent, managing investment risk within income streams is more complex than investing retirement savings in superannuation for your retirement decades away. This is because of the mixed timeframes involved.
Ideally, investments will be organised to defend the value of money you plan to access and spend in the next couple of months or years, as well as looking to grow your investments for later in your retirement, which may still be decades away. Our fact sheet Structuring Income Streams in Retirement looks in detail at approaches to the mix of timeframes for retirees.
Your attitude to investment risk will depend on many factors including your investment objectives, your investment timeframe, your age, and other personal circumstances. Achieving investments with corresponding levels of risk, volatility and potential returns may require more careful attention than deciding a mix of asset classes. Diversification and regular rebalancing are important aspects of managing investment risks within income streams.
For those members who have their income stream spread across multiple investment options and are taking their regular income payments from the cash option, short term fluctuations in different asset classes are factored into the long term investment strategy. This reduces the risk of regularly switching options based on emotion or opinion.
For those who do not use this system, short term fluctuations can be detrimental to the long term performance of their income stream.
Investors often make the mistake of investing in the previous year’s best performing asset class. Historically, the previous year’s best performing investment option can often be the worst performing asset class in the following year. This is why it is important to diversify investments and have a spread across multiple asset classes.
All asset classes will move through different cycles so having a good spread and ensuring that your regular income stream drawdowns are made from a stable option makes a lot of sense.
Ask about our annual financial check program. It is a great way to keep your income stream on track.
Call our member services team on 1300 128 751 to make your appointment for personalised advice.
Email: avsinfo@avsuper.com.au | Local call: 1300 128 751 | www.avsuper.com.au
