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Close to 70% of Australians with super in one of the major funds are invested in their fund’s MySuper option, the default option for employees who don’t wish to choose another super fund. If you are a member of a retail fund, this is most likely a lifecycle product designed to reduce your exposure to higher risk growth assets as you age.
A small number of not-for-profit funds also use a lifecycle design, but most use their traditional balanced or growth option as their MySuper default.
This makes it difficult to compare MySuper returns. Whereas balanced or growth default options have a single strategy for all members with somewhere between 60% and 76% of members’ money in growth assets such as shares with the remainder in defensive assets such as cash and bonds, lifecycle defaults might hold as little as 40% or as much as 88% in growth assets, depending on your age.
For this reason, Chant West reports returns for lifecycle funds separately (see latest returns at the bottom of this article). Most lifecycle funds are based around age groups; when you join the fund you are assigned to a group based on the decade you were born. While your group stays the same, over time your exposure to growth/risk assets changes. So for members born in the 1990s, the median level of growth assets is currently 90% while for Baby Boomers born in the 1940s the median level of growth assets is 45%.
You will notice that the table below includes median returns for MySuper Growth (balanced) default products. This is not as a direct comparison but to illustrate how the lifecycle design functions relative to balanced funds with a median weighting of 72% growth assets.
Why lifecycle funds?
Lifecycle funds, also called lifestage or target date funds, have been around since the early 1990s but didn’t really catch on until after the global financial crisis of 2007–09.
Lifecycle fund returns to May 2021
The impressive share market recovery since the end of March last year has boosted returns for all Lifecycle age cohorts during that period, but younger members with higher allocations to shares have enjoyed the best of bounce back.
Younger members of lifecycle products born in the 1970s, 1980s and 1990s have outperformed the median MySuper Growth fund over all periods shown in the table below. However, Chant West senior investment research manager Mano Mohankumar points out they have done so by taking on significantly more share market risk. “On average, these younger cohorts have at least 20% more invested in listed shares and listed real assets than the typical MySuper Growth option,” he says.
By comparison, older members born in the 1960s or earlier are less exposed to growth assets so they tend to underperform the MySuper median over longer periods. That’s because capital preservation and minimising the risk of a market downturn is more important to people as they near retirement.
Median Retail MySuper Lifecycle Cohort Performance (Results to 31 May 2021)
Source: Chant West. Performance is shown net of investment fees and tax and before administration fees and adviser commissions.