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Risk Measure Guidance – First State Super modelling methodology
The industry has developed guidance on the disclosure of investment risk. This is based on a consistent methodology for determining a standard measure of risk as outlined in the Standard Risk Measure Guidance Paper For Trustees.
The Standard Risk Measure (SRM) allows members to compare investment options that are expected to deliver a similar number of negative annual returns over a 20-year period within and across funds.
If you are an accumulation member, please refer to the relevant Member Booklet (Product Disclosure Statement) for your particular membership category, together with the Member Booklet Supplement: Investments, for the relevant information.
If you are an income stream member, the Member Booklet Pension (Product Disclosure Statement) contains the relevant investment information.
The SRM is not a complete assessment of all forms of investment risk, for instance it does not detail what the size of a negative return or the potential for a positive return could be to meet a member’s objectives.
Members should ensure that they are comfortable with their chosen investment option(s) and seek advice from a licensed financial planner, where appropriate.
Methodology
In order to determine the Standard Risk Measure for an investment option, it is necessary to calculate the frequency of negative annual returns over a 20-year period. This frequency is then translated to a Risk Band with an associated Risk Label – see below:
| Standard risk measure | ||
|---|---|---|
| Risk band | Risk label | Estimated number of years 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 |
First State Super risk labels and risk bands
| Investment option | Accumulation | Income Stream | ||
|---|---|---|---|---|
| Pre-mixed options | Risk band | Risk label | Risk band | Risk label |
| High Growth | 6 | High | 6 | High |
| Diversified (default up to and including age 59) | 6 | High | 6 | High |
| Diversified Socially Responsible Investment (SRI) | 6 | High | 6 | High |
| Balanced (default from age 60) | 5 | Medium-high | 5 | Medium-High |
| Capital Guarded | 3 | Low-medium | 3 | Low-medium |
| Single asset class options | ||||
| Australia Equities | 7 | Very High | 6 | High |
| Australian Equities Socially Responsible Investments (SRI) | 7 | Very High | 6 | High |
| International Equities | 6 | High | 6 | High |
| Property | 5 | Medium-high | 5 | Medium-high |
| Australian Fixed Interest | 4 | Medium | 4 | Medium |
| International Fixed Interest | 3 | Low-medium | 3 | Low-medium |
| Cash | 1 | Very low | 1 | Very low |
Other considerations underlying the modelling methodology
The approach has been based on:
- Long term strategic asset allocations for the Fund’s investment options
- Forward looking asset class assumptions
- Net of tax basis and net of investment management fees – see Net of tax returns below for detail
- Gross of administration fees.
Net of tax returns
While the SRM recommends disclosure of risk measures on a gross of tax basis (ignoring the impact of franking credits and other tax), the trustee of FTC has chosen to use a net of tax basis for disclosure to provide for the impact of franking credits and other taxes, where applicable. With this approach, some investments with Australian equities have a lower risk rating. However, we consider that this provides a more realistic comparison between investment options for members, as investment returns are credited to a member’s account, net of tax and investment management expenses.
