Average Annual Return (AAR) Explained: Your Guide for 2025

How much did your investments really earn last year? And the year before? If you’re searching for a simple way to compare performance, Average Annual Return (AAR) is a key metric every Australian investor should understand in 2025.

What Is Average Annual Return (AAR) and Why Does It Matter?

Average Annual Return (AAR) is the arithmetic mean of a series of annual returns generated by an investment over a specified period. In everyday language, it tells you—on average—how much your investment grew (or shrank) each year. Unlike some performance metrics that smooth out the ups and downs, AAR offers a straightforward snapshot, making it a useful yardstick for comparing everything from managed funds and ETFs to superannuation performance.

Why is AAR important in 2025?

• Transparency: With ASIC’s ongoing focus on clear, comparable disclosures, AAR is now prominently displayed in fund fact sheets and product comparison tools.

• Comparability: New superannuation performance benchmarks introduced by APRA in 2024 mean Aussies can use AAR to spot underperforming funds quickly.

• Decision-making: Whether you’re picking shares, funds, or property, AAR helps you compare apples with apples—though it’s never the whole story.

How to Calculate Average Annual Return in Practice

To calculate AAR, you add up each year’s return and divide by the number of years. For example, if your investment returned 10%, 5%, and 15% over three years, the AAR is (10 + 5 + 15) / 3 = 10% per year.

Example: Calculating AAR for an ETF

• Year 1: +12%

• Year 2: -4%

• Year 3: +18%

AAR = (12 + (-4) + 18) / 3 = 8.67% per year.

Note: AAR does not account for compounding. If your returns are highly volatile, the Compound Annual Growth Rate (CAGR) may give a more accurate picture of actual growth, but AAR remains a popular headline metric for its simplicity.

AAR in the Real World: 2025 Investment Trends and Policy Updates

In 2025, Australians are navigating an investment landscape shaped by rising interest rates, volatile global markets, and new local regulations.

• Superannuation: Under APRA’s updated performance test regime, super funds must publish multi-year AARs for all MySuper and Choice products, helping members spot chronic underperformance.

• Managed Funds and ETFs: ASIC’s new Product Design and Distribution Obligations (DDO) require funds to provide clearer AAR data, including risk warnings and rolling 1-, 3-, 5-, and 10-year averages.

• Property and Alternatives: As fractional property platforms and private credit funds grow in popularity, more providers are highlighting AARs to attract yield-hungry investors. Watch for differences in how fees and tax impacts are reported.

2025 Example: A large balanced super fund reports an AAR of 7.5% over five years. This compares to the APRA industry median of 6.8%, suggesting above-average performance. However, a closer look reveals a volatile 2022 (-3%) and a bumper 2024 (+13%)—context matters!

Limitations and Smart Ways to Use AAR

While AAR is a handy tool, it’s not the full story:

• No compounding: AAR ignores the impact of compounding, so it can overstate growth if returns are volatile.

• Ignores risk: Two investments might have identical AARs, but wildly different risk profiles. Always check volatility, drawdowns, and standard deviation.

• Doesn’t reflect fees or taxes: Ensure you’re comparing after-fee, after-tax returns for an accurate picture.

Smart tips for Aussies in 2025:

• Use AAR as a first filter—but dig deeper into the numbers before switching funds or assets.

• Compare AARs across similar products (e.g., balanced super funds with balanced super funds, not with high-growth or cash funds).

• Ask providers for both AAR and CAGR when returns are volatile.

• Factor in your own investment time horizon—AARs for 1, 3, and 10 years can tell very different stories.

Conclusion: Make AAR Work for Your Wealth in 2025

Average Annual Return remains a cornerstone metric for Australian investors in 2025, especially with new regulatory standards and clearer fund reporting. Use it as a starting point to compare investments, but always check the fine print—returns, risk, fees, and timeframes all matter. With a little extra digging, you’ll be better equipped to make smarter, more confident financial decisions for your future.