In 1990, an American economist called Harry Markowitz won an economics Nobel Prize for showing why you shouldn’t put all your eggs in one basket when it comes to investing.

And let’s face it, there are lots of things to consider like how much risk to take, which asset classes to invest in, and beyond that, which companies and securities to select.

Trying to manage and control this isn’t easy.

But what is easy is getting caught up in emotion like wanting to put all your money in cash when markets are going down, or chasing returns when markets go up.

But as the table below shows, trying to choose the best performing asset classes isn’t straight-forward.

Not only does performance change from one year to the next, there can be large differences in the best and worst annual returns for some asset classes. For example, in its worst year Australian shares lost over 38%, but in its best year it gained over 37%. By contrast the difference in returns for fixed interest are much narrower – a fall of 0.2% in its worst year and a gain of 14.2% in its best.

Best and worst performing asset classes over last 20 years

Year Worst asset class Annual return Best asset class Annual return
1998 Cash 5.1% International shares 29.8%
1999 Diversified fixed interest -0.2% Australian shares 19.5%
2000 International shares 1.3% Infrastructure 12.4%
2001 International shares -9.3% Australian shares 10.5%
2002 International shares -26.9% Property 10.7%
2003 International shares -0.1% Australian shares 15.0%
2004 Cash 5.6% Australian shares 27.9%
2005 Cash 5.7% Australian shares 22.5%
2006 Diversified fixed interest 3.5% Australian shares 24.5%
2007 International shares -0.1% Property 20.4%
2008 Australian shares -38.9% Diversified fixed interest 14.2%
2009 Property -8.9% Australian shares 37.6%
2010 International shares -1.2% Infrastructure 11.8%
2011 Australian shares -11.0% Infrastructure 12.2%
2012 Cash 4.0% Australian shares 19.7%
2013 Diversified fixed interest 2.3% International shares 43.2%
2014 Cash 2.7% International shares 14.1%
2015 Cash 2.3% Property 12.7%
2016 Cash 2.1% Infrastructure 16.7%

 

*The following index data is used in this table.
Australian Shares: S&P ASX 300, Cash: UBS Bank Bill, Property: Mercer Unlisted Property, International Shares: MSCI AC World ex Australia NET WHT, 50% Bloomberg Ausbond Composite (0+Y) + 50% Citigroup WGBI HDG AUD, Infrastructure: Frontier Infrastructure Benchmark

Taking a step back

At AustralianSuper, we believe we can help our members achieve their best retirement outcome by taking a long-term view and having lots of diversification.

A long-term view helps us look through the short-term fluctuations in investment markets, while diversification helps to offset the poor performance of some asset classes, with the better performance of others. So you get a smoother return.

AustralianSuper manager of investment communications Stephen Fallet explains: “One of the reasons why we have diversified portfolios is to protect members’ savings against adverse movements in any one specific security, industry or asset class.”

“What diversified portfolios do – particularly our PreMixed options – is help us produce strong absolute returns over the long term, but do it with less volatility than if you just invested in one asset class. While it won’t fully protect you against a negative return, it will lessen the impact of a poorly performing asset class on your overall returns.”

This means you don’t experience the more extreme highs and lows you can get with investing in one asset class – particularly the more volatile ones such as Australian and International shares. It also means you don’t have to spend time worrying about which is the best asset class to invest in.

Unlisted assets and diversification

Unlisted assets are an important part of AustralianSuper’s asset allocation strategy. Our Balanced option has a much higher allocation to unlisted assets than many other funds.

“One of the benefits of our scale is that it enables us to acquire significant physical assets, like property and infrastructure, that have a long-term investment horizon like most of our members,” says Fallet.

“Our unlisted assets provide strong income and capital growth, with generally lower volatility than investing in shares. These are characteristics we like to have in our PreMixed options.”

How size and scale help

There are other benefits of scale when it comes to managing AustralianSuper’s PreMixed options, with teams of investment specialists dedicated to different parts of the asset allocation process.

“We spend a lot of time focussing on how we can add value through asset allocation,” Fallet says. “In a world where we believe returns across all asset classes are going to be lower, it’s important for us to find additional sources of return for our members. This can only be done by having dedicated resources.”

“We aim to manage portfolios where, through having a range of different asset classes that have different risk/return characteristics, we can generate strong long-term returns for our members even if there is a bit of short-term volatility along the way,” Fallet says.

This approach is paying off. AustralianSuper’s Balanced option, which most members invest in, has delivered an average annual return of 9.58% since its inception in 1985 to 31 December 2016.

It’s not Nobel Prize winning, but employing diversification across AustralianSuper’s range of options delivers consistent and reliable returns to members.

Want to know more?

Check out the current asset allocation of AustralianSuper investment options.

Investment returns are not guaranteed. Past performance is not a reliable indicator of future returns.