The Standard Risk Measure

The Australian Prudential Regulation Authority (APRA) has established a Standard Risk Measure (SRM) system to provide members with a descriptor to assist in comparing investment options by estimating the number of negative annual returns possible over any 20 year period for each investment option.

Members should be aware that the required SRM is not a complete assessment of all forms of investment risk and does not (for example) take into account the impact of administration fees or the magnitude of likely investment earnings (whether positive or negative).

It is also important to understand that the Standard Risk Measure is based on a short term assessment of risk, even though it requires us to estimate the number of negative annual returns which might be expected over a 20 year period. The risk band for each of our options would therefore be different (and likely lower) if your investment horizon is longer.

Risk bands

Investment options are ‘graded’ across seven risk bands as shown in the table below.  Members need to ensure they are comfortable with the risks (especially the risks of negative investment earnings) associated with their chosen investment option(s).

Risk Band Risk Label Estimated number of negative annual returns over any 20 year period
1 Very Low Less than 0.5
2 Low 0.5 to less than 1
3 Low to Medium 1 to less than 2
4 Medium 2 to less than 3
5 Medium to High 3 to less than 4
6 High 4 to less than 6
7 Very High 6 or greater

How do we calculate the SRM for each AvSuper investment option?

The risk band and label reflect the estimated number of negative annual returns possible over any 20 year period for each investment option. The number of negative returns is calculated at least annually using our investment adviser’s projected capital market assumptions (for investment risk, investment returns and market correlations) for the assets classes in which AvSuper invests, as applied to each investment option’s strategic asset allocation.

The projected capital market assumptions are conservative and based on our investment adviser’s expectations of asset class performance over the long term (5 years or more) under normal circumstances. They do not allow for projected short term returns (as these are difficult to predict). Investment return assumptions are net of expected investment management fees but gross of tax and administration fees.