Younger people are usually more prepared to take risks than their older counterparts, and some super funds have adopted the same philosophy.
Taking risks while younger, the theory goes, makes sense as it allows growth through trial and error while delivering valuable life lessons along the way.
Now some super funds are following that logic and moving members into more conservative investments as they age; a practice called lifecycle investing.
The idea behind this model is that you build wealth more aggressively when young, then protect it against possible losses once you are older.
Other default funds instead keep everyone in the ‘balanced’ portfolio option (with 60 to 80 per cent exposure to growth assets like stocks) unless they make another choice.
Which is best?
The answer to that is complicated, but a starting point is to look at the performance of MySuper products, the default funds for people who don’t make their own choice, in 2018.
Here’s how the lifecycle funds fared for those aged between 30 and 39 according to Rainmaker:
And this is how the top funds that kept everyone in the balanced bucket fared over the same period:
Measured over one year, the single strategy funds clearly did better, returning between 2.7 per cent and 5.3 per cent to members while lifecycle funds delivered only as high as 2.5 per cent and as low as negative 2.6 per cent.
Over three years (which Rainmaker targets as the most significant period), the single strategy also won out, scoring a high of 8.3 per cent for Hostplus and 7.1 per cent for the 10th performer MIESF Super.
The top performing lifecycle fund, SunSuper, delivered 7.3 per cent over three years while the Telstra fund was 10th with 5.6 per cent. Even over five years the single strategy won out.
However ANZ disputed these results, saying its lifecycle options have performed well with a three year return of 9.82 per cent and 8.32 per cent over five years to April this year.
ANZ superannuation chief Mark Pankhurst said “We have deliberately taken a life-stage investment strategy approach because we believe that a fund should be designed and executed with the best interests of members at heart”.
Rainmaker CEO Alex Dunnin said the difference between ANZ and Rainmaker figures is likely due to the use of different time frames and the way costs are counted.
So what’s going on?
Mr Dunnin said the short term performance differences related in part to how lifecycle funds invest.
“Lifecycle funds are very equities orientated, so if you measured the year to June 2018 they would have done a lot better.”
However the point of super tables is not to choose what looks best, it has to work over your whole life regardless of market fluctuations.
“While lifecycle funds sound like a very compelling proposition that makes perfect sense, the funds can overcomplicate the investment story,” Mr Dunnin said. That has meant they haven’t performed as well as they theoretically ought due in part to higher costs.
One size doesn’t fit all
David Simon, principal of Integral Private Wealth, said in his eyes there are two things wrong with lifecycle investing.
“Some younger people can be very conservative investors while older people can be very aggressive,” he said.
“Also, taking a conservative position as you age is not right for everyone. Take a woman who has taken a lot of time out of the workforce to raise children; she would have a low balance when she ages and might need to work into old age to build her fund.
“Moving such a person into a very conservative option would restrict her ability to build a balance late in life.”
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