Super fund members who stayed the course and maintained their exposure to growth assets through the 2021 financial year have been handsomely rewarded. Listed markets in growth assets – shares and property – rebounded strongly from their COVID-induced lows, and powered growth funds to near record returns.
The median return for the dominant Growth category (61-80% growth assets) was a stunning 18% – the second highest ever in the 29 years since the introduction of compulsory superannuation. A positive return was perhaps not unexpected following the small negative recorded in 2019/20, but the magnitude was still astonishing, considering that the economic damage resulting from the pandemic is a long way from being repaired.
Table 1 shows the returns for each of the traditional diversified risk categories in our Multi-Manager Survey, ranging from All Growth to Conservative. Given the stellar returns from growth asset sectors over the year, it is not surprising that the All Growth and High Growth median returns were both well above 20% for the year. Even the more defensive Balanced and Conservative categories delivered returns well above their long-term averages.
The source of these excellent returns is evident from Table 2, which shows the performance of the main asset sectors over the year and for longer periods. The major listed markets led the way over the year, with very strong returns from Australian and international shares and property. Listed infrastructure also performed strongly. In the unlisted space the star performer was private equity, while unlisted property and infrastructure were solid if not spectacular. The traditional defensive assets of bonds and cash delivered flat or small negative returns.
Growth fund members were not the only beneficiaries of the surge in growth assets. Young and not-so-young members in lifecycle options also enjoyed the ride. That is because in most of these products the growth asset weighting for members aged up to about 50 (or in some cases even older) is now higher than the typical 70% for traditional growth funds. As a result, many of these members will have enjoyed returns well in excess of 20% in FY21, making up for the disappointing result in the previous financial year.
Lifecycle options now account for about 40% of all MySuper assets, so this represents a significant increase in the number of members, and assets, in what we classify as high growth portfolios (81 to 95% growth assets). These lifecycle products are relatively new in Australia, with almost all having been introduced as default options under the MySuper regime which began in January 2014. However, since then, only a few funds have switched from offering a single option MySuper default to a lifecycle solution – presumably because of the challenges with administration and communications with members. Funds that switched to lifecycle models in recent years include MLC, Russell and Australian Catholic Super.
Since the advent of MySuper, lifecycle design has steadily evolved, with some earlier flaws being rectified and more sophistication being built in. We welcome these enhancements which should result in better long-term outcomes for large numbers of disengaged members. We also believe that a well-designed lifecycle solution has the potential to provide members with stronger outcomes at retirement than a typical 70/30 option.
The key things we look for in lifecycle solutions are:
A high allocation to growth assets for younger members
That high growth asset allocation to be maintained for longer (until at least age 50, subject to member demographics)
Retain a meaningful allocation to growth assets at retirement (50% or above) – this is even more pertinent given the current outlook for traditional defensive sectors and the fact that older members aren’t going to get much from having cash in their bank accounts
Once de-risking commences, a smooth reduction in growth assets through the use of various building block diversified portfolios
High quality underlying investments
So what were some of those early flaws in lifecycle strategy design?
The early lifecycle models were largely built around the notion that members would access most, if not all, of their money at retirement and could afford very little risk in the pre-retirement phase. While most lifecycle strategies had young members typically starting off with 85% to 95% growth assets, their de-risking commenced too early –in most cases about age 40 to 45 with some de-risking even earlier. It was quite common for the growth/defensive mix to reduce to 50/50 as early as age 55, and to 30/70 or 40/60 by age 65. This was despite the fact that members have 20 or more years life expectancy beyond retirement. Even those who need to draw down their super assets early will have access to the Age Pension, which serves as a Government-guaranteed safety net – the ultimate defensive asset.
The other shortcoming (but less of an issue) with early lifecycle models was the transition once de-risking commenced. Some of those models – mainly in the not-for-profit sector – featured quite abrupt changes in asset allocation as members transitioned from one risk category to the next at pre-defined ages (eg, reducing growth assets by 20% on a given day). This gave rise to arbitrary and unwanted risks that impacted some members but not others.
Similarly, many of the early retail models grouped members into age cohorts and then gradually de-risked their asset allocation over time. The problem was that typically the cohorts spanned 10-year age bands, which meant that members born nearly 10 years apart had the same asset allocation. Conversely, members born just a few days apart, at the start and end of decades, could have significantly different risk profiles.
There is a transitional issue in moving from an old default into MySuper lifecycle defaults, that hasn’t been spoken about much to date. The reason why older members were de-risked to between a 30% and 50% growth assets in a lifecycle strategy was because it assumed they had a 85% growth asset exposure in their younger years, which is the way the glidepath works. But in reality, this wasn’t the experience of older members who were moved to a lifecycle strategy, as most of them would have been in a 70/30 portfolio beforehand.
Thankfully the extreme cautiousness of the old approach has been acknowledged and models are being transformed. Up to about age 45, the majority of a member’s account balance growth is accounted for by contributions rather than investment earnings on their balance. It is really only from age about 50 that investment returns become the dominant factor. It is counter-productive, therefore, to de-risk portfolios long before the money is likely to be accessed and at a time when the higher returns expected from growth assets can have the greatest impact.
These arguments have prompted a major shift in the de-risking process. Nowadays it is not unusual to see growth asset allocations of 75% or more still in place at age 55, and more than 50% in growth assets at age 65. This acknowledges that members are increasingly likely to maintain their investment in super well after retirement as they move into the pension phase.
Additionally, some of those lifecycle models with lumpy and sometimes arbitrary transitions to lower growth assets are gradually being refined and improved with more incremental allocation changes to growth asset allocations. However, some funds have retained the more simplistic step approach to de-risking (possibly because of challenges with administration), even if they’ve enhanced their model by de-risking later.
Most recently, we’ve seen Aware Super restructure and enhance its lifecycle strategy, now ticking all the boxes we consider in terms of glide path design and implementation as well as high quality underlying investments.
The few funds mentioned earlier that switched from a single option default to a lifecycle solution in recent years (Australian Catholic Super, MLC and Russell) took on board key lessons learnt from early lifecycle models in designing their strategies. Indeed, Russell’s innovative GoalTracker raised the bar in terms of sophistication with its more tailored approach based on personal information provided by members. We expect to see more funds going down this path in the coming years.
The 2020/21 financial year was exceptional and represented a stunning recovery from last year’s financial crisis sparked by the COVID pandemic. Looking at the bigger picture, however, we can see that it continued the pattern that has seen funds deliver on the risk and return expectations of their members over the long term.
The accompanying chart plots the performance of the median growth fund for each of the 29 financial years since July 1992, the start date for compulsory superannuation. Over that very long period – which now stretches more than a generation – the median return averages 8.2% per annum. Inflation has averaged 2.4% per annum over the same period, so the real return (which we should note is after fees and after tax) has averaged 5.8% per annum. That is an exceptional performance, and easily surpasses the typical target of beating inflation by 3.5% per annum..PNG "RP-chart-1-Jun21-(1).PNG")
Not only has the investment performance been exceptional, but it has been achieved without straying beyond the acceptable risk parameters that funds set for themselves. Typically, the target is no more than one negative return in five years on average, which over 29 years would equate to no more than five (or almost six) negative years. In fact there have only been four.
So super continues to be a very good way for the average Australian to invest. Whether they make their own investment decisions, or have those decisions made for them in a default option, they can be confident of receiving good value for every dollar they put away.
International share market returns in this media release are sourced from MSCI. This data is the property of MSCI. No use or distribution
without written consent. Data provided “as is” without any warranties. MSCI assumes no liability for or in connection with the data. Product is not sponsored, endorsed, sold or promoted by MSCI. Please see complete MSCI disclaimer.
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