What are lifecycle super funds, and how do they perform?

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 members born in the 1990s are currently invested in 88% growth assets while Baby Boomers born in the 1940s hold only 40% growth.

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 an average 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 August 2020

The surprisingly strong share market rally from April through to August resulted in strong positive returns for all Lifecycle cohorts during that period. However, the big COVID-related falls in February and March resulted in options for members born in the 1970s to the 1990s (which have higher allocations to growth assets) generally faring slightly worse than older cohorts over the past year. Over longer periods of five years or more, those higher-risk options have generally performed best, as you would expect, although not as well as the median MySuper Growth option.

According to Chant West, the reason these younger cohorts in retail lifecycle funds have underperformed the MySuper Growth option is that, while they are generally well-diversified, these funds don’t have the same level of diversification as many of the not-for-profit funds. This is mainly due to the not-for-profit funds’ higher allocations to unlisted assets (unlisted property, unlisted infrastructure and private equity) – about 21% on average. This compares with the retail lifecycle fund average of 5% for these younger cohorts, although there are a few that have 10-14% unlisted asset allocations.

These unlisted assets have been proven to add value over the long term relative to listed markets while providing great diversification benefits which help to smooth returns for fund members. However, Chant West notes that short-term performance comparisons are complicated by the fact that some funds have devalued their unlisted assets more aggressively than others over the course of the COVID crisis.

The older cohorts (those born in the 1950s or earlier) are relatively less exposed to growth-orientated assets so you would expect them to underperform the MySuper Growth median over longer periods. Capital preservation is more important at those ages so, while they miss out on the full benefit in rising markets, older members in retail lifecycle options are better protected in the event of a market downturn, as was evident during the past year.

Median Retail MySuper Lifecycle Cohort Performance (Results to 31 August 2020)

Source: Chant West. Performance is shown net of investment fees and tax and before administration fees and adviser commissions.