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Lifecycle investment options (returns to December 2018)

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If you haven’t chosen your own super fund, or you haven’t actively selected an investment option, then you need to be aware that your super money may not be invested within a traditional default growth investment option (which has at least 60% of your super money invested in growth assets such as shares and listed property).

Rather, your super money may be invested in a lifecycle product, which invests according to your age, and reduces the amount of growth assets as you get older. The practical effect of such a strategy is that the super accounts of older fund members in lifecycle products will underperform the traditional growth investment options.

For performance information on lifecycle investment options see text and table below (for performance information on the traditional growth investment option, see SuperGuide article Investment performance: Latest super returns (to December 2018)).

Note: If you have read a previous version of this article, and want to refer immediately to the performance table, then click on the link below:

Is your super invested in a lifecycle product?

According to Mano Mohankumar, senior investment research manager at Chant West, the traditional growth fund category Chant West rates, “… is still where most [Australians] have their super”. Mohankumar says that the traditional growth fund category includes the MySuper default options for those funds that have opted for a ‘traditional’ diversified growth portfolio as well as a number of non-default options that are available to members who make their own investment choice.

Mohankumar notes however that while the growth investment option is still where most people have their super, most retail fund default members (members who don’t actively choose an investment option). “…have adopted a lifecycle design for their [default MySuper option], where members are allocated to an age-based option that is progressively de-risked as that cohort gets older”.

He says that a few not-for-profits have also gone down the lifecycle path, so that overall about a third of MySuper default money is now in a lifecycle product.

Note: In general terms, MySuper is the super product where your super money lives, when you have not actively chosen your super fund (for more information on MySuper, see SuperGuide article MySuper: Now at a super fund near you).

Mohankumar has previously commented that lifecycle products work in the following way: “Allocations to growth assets (like shares and property) start off high (typically about 90% at younger ages) and reduce gradually over time to an average of about 45% by age 65”. He explains that because de-risking takes place progressively within the investment option, it’s difficult to make direct comparisons of the performance of these age-based options, with the traditional options that are based on a single risk category.

As a result, Chant West has introduced a separate investment performance category for retail lifecycle products (which is great news for those Australians with super money held in such products), which are usually categorised in 10-year age bands, based on the decade in which the member was born, so there are different options for those born in the 1940s, 1950s, 1960s, 1970s, 1980s and 1990s.

Set out in the table below is the median performance for the retail MySuper Lifecycle products, for the following age bands: those born in the 1990s, 1980s, 1970s, 1960s, 1950s, and the 1940s. You will notice that for those born before the 1970s, the allocation to growth assets drops dramatically, which will in turn mean lower investment returns over the longer term.

Mohankumar also has previously noted that some not-for-profit funds (such as industry funds) have also taken up lifecycle products but with a different approach. Instead, those not-for-profits which have lifecycle products simply ‘switch’ members from one risk category to another category as the fund member ages, rather than grouping members of a similar age in the one product. The diversified options used when switching reflect the 5 main investment options (and traditional risk categories) that Chant West already rates (see SuperGuide articles Investment performance: Latest super returns (to December 2018) and Superannuation Investment Performance Reckoner: Discover annual returns for 5 investment options).

Do lifecycle products deliver better returns than traditional growth options?

Mohankumar has previously warned that caution should be taken when comparing the performance of the lifecycle cohorts (options covering 10-year age bands) with the median MySuper growth option, because they are managed differently so the level of risk is also different. He says: “The past few years have seen strong performance from growth assets so, as you would expect, the options that have higher allocations to growth assets have done best.

According to Mohankumar, since MySuper began in January 2014, younger members of retail lifecycle products – those born in the 1970s, 1980s, and 1990s – have held their own compared with the median MySuper Growth fund, but have done this by taking on more equity market risk. He says, strong returns are especially valuable at younger ages because they create a higher asset base from which growth can compound over the long period to retirement.

Unfortunately, until recently, “older members in retail lifecycle products have not fared as well – those born in the 1960s or earlier – have underperformed traditional MySuper Growth options by some margin because these older cohorts take on less risk. This is because capital preservation becomes more important at those ages so, while they miss out on the full benefit of rising markets, older members in lifecycle strategies are better protected in the event of a market downturn.” As a result, the older members of such lifecycle products suffered less during the late 2018 sharemarket downturn, but have still underperformed over the calendar year, compared with the median MySuper growth super fund.

Median retail MySuper lifecycle cohort performance table for (Results to 31 December 2018)

Cohort Category (Born in…) Median Growth Assets (%) 1 mth (%) 3 months (%) 1 Yr (% pa) 3 Yrs (% pa) 5 Yrs (% pa)
1990s 88 -1.9 -6.9 -1.9 6.0 6.3
1980s 87 -2.0 -6.8 -1.9 6.1 6.3
1970s 87 -2.0 -6.6 -1.7 6.0 6.2
1960s 67 -1.5 -5.1 -0.7 5.2 5.6
1950s 45 -0.6 -2.7 0.2 4.3 4.8
1940s 40 -0.4 -2.6 0.6 3.9 4.3
MySuper Growth 72 -0.9 -4.5 1.0 6.8 6.9

Note: Performance is shown net of investment fees and tax. It does not include administration fees or adviser commissions.

Source: Chant West 17 January 2019 media release (www.chantwest.com.au), and subsequent information provided by Chant West.

For more information…

For more information about investment performance for Australian super funds, see the following SuperGuide articles:

For more specific information about investment performance for Australian super funds for the latest financial year, see the following SuperGuide articles:

For more specific information about investment performance for Australian super funds for the latest calendar year, see the following SuperGuide articles:

For more information about comparing the investment performance of Australian super funds, see the following SuperGuide articles:

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