Investing in super: asset classes

ESSSuper’s investments cover a wide range of asset groups and global markets. In this episode of our Exploring Super podcast, ESSSuper Investment Manager Leroy D’Souza joins us to discuss the investment options available to our members, how they work and the objectives behind them. 

Transcript

00:00:02 

You're listening to Exploring Super, the exclusive podcast for ESS Super members. 

00:00:11 

Welcome to Exploring Super, the exclusive podcast for ESS Super members. 

00:00:16 

My name is Christian Kueng and I'm the Manager of Member Education. 

00:00:19 

And I'm Felicity Brasher. 

00:00:21 

I'm the Group Executive for Member Engagement. 

00:00:24 

And today we're going to be having a brief look at how ESS Super invests on your behalf, specifically through the accumulation plan, beneficiary account and income stream products. 

00:00:34 

We'll explore the range of investment options available from diversified portfolios to individual asset classes and the objectives behind them. 

00:00:43 

It's important to remember that all investments involve some level of risk. 

00:00:47 

However, ESS Super provides a variety of resources to help you choose an investment approach that aligns with your needs. 

00:00:54 

Please note, this episode is for general information only. 

00:00:58 

We're not offering financial advice or recommendations. 

00:01:02 

To help us with this, we've invited Leroy D'Souza, our Investments Manager, to give us some insights into our invested funds. 

00:01:10 

Thanks for coming on, Leroy. 

00:01:11 

Thanks for having me. 

00:01:12 

Great. 

00:01:13 

So we might kick off with the first question. 

00:01:16 

We've currently got 10 investment choices here at ESS Super for members to choose from. 

00:01:21 

Can you explain a little bit about the selection available? 

00:01:25 

Yeah, sure. 

00:01:26 

So members in the ESS Super accumulation plan have the flexibility to choose how their super is invested. 

00:01:33 

You can mix and match from eight diversified options and two single asset class options. 

00:01:39 

each designed with different investment goals and risk levels. 

00:01:43 

The diversified options are essentially ready-made portfolios that spread your super across multiple asset classes, things like shares, bonds, property, or cash. 

00:01:54 

This approach is called diversification, and it's one of the most effective strategies to reduce investment risk. 

00:02:01 

By not putting all your eggs in one basket, diversification helps smooth out the ups and downs and returns over time, 

00:02:09 

and provides a more stable return profile. 

00:02:12 

Great. 

00:02:12 

On the other hand, single asset class options focus exclusively on one type of asset, which gives our members more control to tailor their investment strategy. 

00:02:23 

But it's important to remember that the risk and return for these options 

00:02:27 

depends entirely on that one asset class. 

00:02:30 

Right. 

00:02:30 

So for example, the shares only option is driven solely by share market performance, which tends to be fairly volatile. 

00:02:38 

Yeah. 

00:02:38 

And on the other hand, you've got the cash option, which is much lower risk because it only invests in cash. 

00:02:44 

Yes. 

00:02:45 

Fair enough. 

00:02:45 

So single asset class options work best when combined with other options. 

00:02:50 

to build a well-rounded portfolio. 

00:02:52 

Our goal at the end of the day is to give our members the ability to align their investments with their age, risk tolerance, and retirement goals. 

00:03:00 

And if you don't make a choice, your money will usually be invested in the fund's default option. 

00:03:06 

Thanks, Leroy. 

00:03:06 

So how does EWS Super invest members' money? 

00:03:09 

That's a really good question, Christian. 

00:03:11 

So 

00:03:12 

When members make contributions to their superannuation account, either through their employer or directly, they're pooled with those of other members invested in the accumulation plan on their behalf. 

00:03:24 

So at ESS Super, our investment approach is guided by a number of core principles that are all designed to grow our members' retirement savings in a sustainable and 

00:03:34 

and well-managed way. 

00:03:36 

So first and foremost, we have a legal obligation to act in our members' best financial interests. 

00:03:42 

Yes. 

00:03:42 

This isn't just a guiding philosophy. 

00:03:45 

It's A fiduciary duty under superannuation law. 

00:03:48 

So every investment decision that we make is grounded in the goal of delivering strong retirement outcomes for members. 

00:03:55 

Excellent. 

00:03:55 

The second big principle, as we talked about a little bit earlier, is diversification. 

00:04:00 

So this means that we spread our investments across a broad range of asset classes. 

00:04:05 

So at ESS Super, this includes Australian and international shares, property, infrastructure, private equity, fixed income, credit, cash, and alternative growth, which we might talk about a little bit later on. 

00:04:20 

Each of these reacts differently to market conditions. 

00:04:23 

So by investing across a mix, we reduce risk and smooth out returns for our members over time. 

00:04:30 

We also take a long-term investment approach, which is a huge advantage. 

00:04:34 

Unlike some investors who need quick wins, we can invest in projects that might take years to mature. 

00:04:41 

So these are things like infrastructure developments or private market opportunities. 

00:04:46 

because we're focused on your retirement, not short-term gains. 

00:04:49 

That makes sense. 

00:04:50 

Value for money is also a key focus for us, so we keep a close eye on investment fees and management costs because lower costs means more money stays in our members' superannuation, working towards their future. 

00:05:04 

We like that, Levi. 

00:05:05 

Yeah, that's great. 

00:05:07 

And last but not least, we're also focused on responsible investments, increasingly so. 

00:05:13 

So these are environmental, social, and governance factors, or you might have heard ESG factors. 

00:05:18 

Yeah, pretty popular topic. 

00:05:19 

Yeah, so they can really affect long-term financial performance. 

00:05:24 

So we're actively considering these risks and opportunities when they're relevant across our entire portfolio, because that's part of delivering sustainable returns for our members over the long term. 

00:05:35 

Now, behind the scenes, managing your super is a very structured process. 

00:05:39 

We have a team of internal investment staff, plus partnerships with external specialists to make sure that our members' money is in the best possible hands. 

00:05:48 

Great. 

00:05:48 

For members in our accumulation plan, retirement income stream, working income stream, and beneficiary account, we don't manage every investment directly. 

00:05:58 

Instead, we appoint specialist external investment managers. 

00:06:02 

Now, these are expert firms that focus on specific markets 

00:06:07 

or asset classes. 

00:06:08 

Right. 

00:06:08 

But importantly, those managers operate within a clear framework. 

00:06:13 

So all investment decisions are guided by our board's investment committee, which sets out the strategy and guidelines for our investment portfolio. 

00:06:21 

The investment managers are selected by this committee based on advice from our internal investments team. 

00:06:26 

Now, the internal team plays a central role through this entire process. 

00:06:30 

So they report regularly to the investment committee on how our investment managers are 

00:06:35 

and our asset classes are performing. 

00:06:38 

They review advice from external consultants and make tailored recommendations to ensure that it's aligned with our members' best interests, implement decisions made by the board and committee, as well as managing our asset allocation. 

00:06:51 

So that means deciding how much is invested in each asset class that ESS Super invests in. 

00:06:58 

Now, under certain limited authority, the internal team can also make adjustments 

00:07:03 

in particular market conditions. 

00:07:05 

So that's shifting part of the portfolio into a particular asset classes, as well as if a new opportunity pops up that fits our long-term strategy. 

00:07:14 

Now they're supported by Frontier, who are our independent investment consultant. 

00:07:20 

Frontier provides strategic advice and helps us monitor the performance and risk of the managers that we've appointed. 

00:07:26 

Now to sum all of that up together, so our members' superannuation is actively managed through a well-governed process with internal experts. 

00:07:36 

external specialists, and regular oversight, all working towards growing our members' superannuation in a smart, balanced, and sustainable way. 

00:07:45 

So Leroy, earlier we spoke about the fact that we've got 10 investment options there for members. 

00:07:52 

And I understand that two of our options are managed just a little bit differently. 

00:07:57 

Can you talk to us about the difference there? 

00:07:59 

Yeah, it's a really good point that you've raised, Felicity. 

00:08:02 

So the two of our options that stand out because they take a slightly different approach are the balanced growth and the ethical diversified options. 

00:08:10 

Okay. 

00:08:11 

So let's start with the balanced growth option. 

00:08:13 

Okay. 

00:08:14 

So this option has been designed to be a low-cost alternative. 

00:08:18 

to the balanced growth managed option. 

00:08:20 

Okay. 

00:08:21 

So the way we keep costs down is that the Australian and international shares allocations within balanced growth are completely passively managed. 

00:08:30 

Right. 

00:08:31 

What this means is instead of trying to beat the market, these passive investments aim to match the performance of a market index like the ASX 200. 

00:08:40 

Because there's very little trading and not much research needed to match the index, the fees for passively managed shares are usually a lot lower. 

00:08:49 

Right, makes sense. 

00:08:50 

Now, the rest of the asset classes within the balanced growth option, though, are managed the exact same way as our diversified options, so you still get a well-rounded, well-diversified investment measure. 

00:09:01 

Okay. 

00:09:02 

So the second option that's a little bit different is the ethical diversified option. 

00:09:06 

Now, this one is tailored for members who want their investments to reflect stronger ethical and ESG considerations. 

00:09:12 

Okay. 

00:09:13 

So the ethical diversified option is completely managed externally by Pendle Group, which is a reputable Australian investment manager. 

00:09:21 

Okay. 

00:09:21 

They manage the option as a pooled investment called the Pendle Sustainable Balanced Fund. 

00:09:27 

Now, according to Pendle's 

00:09:29 

product disclosure statement. 

00:09:31 

This fund 

00:09:32 

is on investing in companies and industries that demonstrate strong ESG practices. 

00:09:37 

Yeah. 

00:09:38 

What that means is they actively look for businesses that are committed to sustainability, ethics, and corporate responsibility. 

00:09:45 

Right. 

00:09:45 

Now, Pendle also applies a strict exclusionary policy, so they won't invest in companies involved in certain industries that don't line up with their ethical standards. 

00:09:55 

Okay. 

00:09:55 

This includes companies that produce tobacco or alcohol, 

00:10:00 

manufacture gaming or gambling equipment, make weapons or armaments, produce or distribute  mine uranium for weapons purposes, or companies that extract thermal coal or produce oil from oil sands, activities that are known for their significant environmental impact. 

00:10:18 

Right, okay. 

00:10:19 

So the main thing that we're trying to achieve with the ethical diversified option is to give members the chance to align their superannuation 

00:10:28 

with their personal values. 

00:10:29 

Yeah, that's nice. 

00:10:31 

In saying that, we do have a responsible investments policy that guides all our investments. 

00:10:37 

And as I mentioned earlier, 

00:10:39 

ESG is a key consideration in our overall investment process. 

00:10:43 

Thanks, Leroy. 

00:10:43 

So you've explained all the different asset classes that we have. 

00:10:47 

I was wondering if you could go in a little bit more detail about what are these asset classes for our members? 

00:10:52 

Yeah, sure. 

00:10:52 

So earlier we touched on diversification, which is really just about spreading your investments across different types of assets to help manage risk. 

00:11:00 

The idea is that if one part of your portfolio isn't performing well, others might be doing better. 

00:11:06 

So you're not just relying on one investment to deliver returns. 

00:11:10 

It's a way that we make sure that we smooth out returns over a long period of time. 

00:11:15 

That makes sense. 

00:11:16 

Now at ESS Super, we invest across nine different asset classes, which gives our members superannuation, broad exposure to different markets and economic conditions. 

00:11:27 

These include Aussie and international shares, private equity, property, 

00:11:33 

infrastructure, alternative growth, credit, defensive fixed income, and last but not least, cash. 

00:11:40 

Let's go through each of them briefly. 

00:11:42 

So first up, Aussie and international shares. 

00:11:45 

Now, shares are basically small pieces of ownership in a company. 

00:11:49 

So when we say we're investing in shares, we're essentially buying stakes in companies like BHP, Woolworths, or big global giants like Apple or Nvidia. 

00:11:59 

Now, if the company grows and does well, 

00:12:01 

the share price usually rises and your investment grows too. 

00:12:05 

Some companies also pay dividends, which is similar to making profit payments, and these can be reinvested to boost our member superannuation over time. 

00:12:15 

Now we invest in Australian shares. 

00:12:18 

which is companies listed on the ASX. 

00:12:20 

Yep. 

00:12:21 

And international shares, which are stocks listed on stock markets across the world. 

00:12:25 

Sure. 

00:12:25 

Shares typically offer higher long-term returns than other asset types, but they can also go up and down more in the short term. 

00:12:32 

Yeah. 

00:12:33 

So there's more investment risk involved. 

00:12:35 

Next up, we've got private equity. 

00:12:37 

So this means investing in companies that aren't listed on the stock exchange. 

00:12:42 

So they're private businesses. 

00:12:44 

Now, private equity firms pool money from large investors like superannuation funds and use it to help these private businesses grow. 

00:12:52 

If they're successful, they'll later sell the business or list it on the stock exchange for a profit. 

00:12:58 

Now, private equity comes with higher risk. 

00:13:01 

These investments are harder to sell quickly, so they're less liquid and they're less transparent than stocks that might be listed on the stock exchange. 

00:13:10 

Yes, right. 

00:13:11 

But at the end of the day, they still offer strong long-term returns. 

00:13:15 

Excellent. 

00:13:15 

Then we've got property. 

00:13:16 

Now in superannuation, this usually means investing in commercial real estate. 

00:13:21 

So that's things like office buildings, shopping centers. 

00:13:25 

warehouses, and data centers. 

00:13:27 

Now, these properties generate income through rent. 

00:13:30 

They can increase in value over time. 

00:13:33 

And at the end of the day, they add stability to your portfolio, since property tends to move differently in terms of returns compared to shares. 

00:13:42 

So it's a long-term investment that can help smooth out our members' superannuation returns. 

00:13:48 

Infrastructure is similar to property in that it involves investing in large-scale essential assets. 

00:13:55 

Now, in an infrastructure's case, this includes things like toll roads, airports, water utilities, or energy networks. 

00:14:03 

These are assets people rely on every day, and they often have stable long-term cash flows backed by contracts or government regulation, which makes them reliable income generators and lower in volatility compared to shares. 

00:14:18 

We also have the alternative growth asset class, which is a little bit more diverse and flexible in terms of the definition of what it includes. 

00:14:27 

These are investments that don't quite fit into the traditional categories. 

00:14:32 

It might include things like hedge funds, commodities, foreign currency, or private debt. 

00:14:37 

The goal with alternative growth is really to help diversify returns 

00:14:42 

and reduce reliance on any particular asset class. 

00:14:45 

Right. 

00:14:46 

We also have the credit asset class, which is where we invest in loans to companies and earn interest in return. 

00:14:52 

So these include corporate bonds and private loans. 

00:14:56 

It's similar to fixed income. 

00:14:58 

but usually involves slightly more risk and potentially more return than government bonds. 

00:15:04 

Credit essentially helps generate steady income and adds stability to our members' superannuation portfolio. 

00:15:10 

Okay. 

00:15:10 

And then we have the defensive fixed income asset class, which as the name suggests, is about protection and stability. 

00:15:17 

Right. 

00:15:17 

This includes investments like government bonds or very high quality, very well-rated corporate bonds. 

00:15:25 

They pay regular interest, they're lower risk, and that 

00:15:28 

That makes them useful for protecting our members' savings during market downturns and smoothing out volatility in the short term. 

00:15:35 

Sure. 

00:15:36 

And finally, last but not least, we've got cash, the most defensive and liquid asset class. 

00:15:41 

This includes things like bank deposits, term deposits, or short-term government securities. 

00:15:47 

Cash won't grow your superannuation much, but it's there to provide capital protection and provide quick access if members need access to funds. 

00:15:57 

Okay. 

00:15:57 

Now, why do we invest across all of these asset classes? 

00:16:01 

Because each one performs differently depending on what's happening in the market. 

00:16:05 

Yeah. 

00:16:05 

For example, if shares are falling, defensive assets like bonds or infrastructure might hold steady or even rise over time. 

00:16:14 

That's the whole point of diversification. 

00:16:17 

It helps balance out risk and returns over a longer period of time and gives our members a smoother investment journey towards retirement. 

00:16:25 

So I'm just wondering, what resources do we have on our website to help members make these sorts of decisions on their investments? 

00:16:33 

And Christian, I might ask you to handle that one. 

00:16:36 

Yeah, thanks, Felicity. 

00:16:38 

Look, first we have our historical performances. 

00:16:40 

And of course, while past performances can't dictate any future returns, it can show you the different investment options and how they've performed in various periods. 

00:16:48 

We provide annual returns going back 10 years and with the 10, five and three-year averages as well. 

00:16:53 

We also have monthly returns and financial year-to-date returns for those sort of more shorter term viewpoints and also daily unit prices, which are useful when switching investment options through our members online. 

00:17:04 

We also provide a wealth of information like we've covered today, as well as laying out the objectives we're trying to achieve for each investment option. 

00:17:11 

So by using the information that we've been through today and what's on our website, our members can get a clearer picture of what investment choices they have and what's inside the 

00:17:18 

investment options that you can choose from. 

00:17:20 

In the calculator section, we also have an investment risk profiler. 

00:17:23 

And this is a questionnaire for members. 

00:17:25 

And based upon their responses, the calculator will relate back our investment options and what might be the most appropriate investment choice for that member. 

00:17:32 

Oh, that sounds super helpful. 

00:17:34 

And finally, of course, we can make a referral to a financial advisor. 

00:17:38 

So if you're seeking personal tailored investment advice. 

00:17:40 

Leroy, thank you so much for coming in today and sharing your insights. 

00:17:44 

We look forward to having you on again sometime. 

00:17:47 

Yeah, sounds good. 

00:17:48 

Thanks so much, Felicity and Christian. 

00:17:49 

Well, that wraps up today's episode of Exploring Super, the exclusive podcast for ESS Super members. 

00:17:55 

We look forward to producing more content for you at ESS Super, proudly serving our members. 

00:17:59 

If you'd like more information about our investments and products, please go to essuper.com.au. 

00:18:08 

This podcast is of a general nature only and does not consider your personal circumstances, financial needs or objectives. 

00:18:16 

Before acting on any advice contained in this podcast, please download and read the relevant product disclosure statement and target market determination found on our website, essuper.com.au. 

00:18:29 

The board recommends that you seek financial advice before acting upon this information. 

00:18:34 

Investment returns cannot be guaranteed as investment markets can be volatile. 

00:18:39 

As a consequence, returns can be positive or negative. 

00:18:43 

Past investment performance is not a reliable indicator of future performance. 

00:18:47 

Benefits in ESSuper's accumulation plan, income streams, and beneficiary count products are not guaranteed or underwritten by the Victorian Government or ESSuper. 

00:18:57 

Any institutions mentioned by name does not constitute endorsement.