Home' Superfunds : Superfunds September 2014 Contents Superfunds September 2014
and expanded to take into account more
characteristics and hence a wider range of default
QSuper is the only fund to so far implement a
more advanced assessment that not only takes
into account members’ age, but the size of their
THE RISK-RETURN TRADE-OFF
The quality and composition of lifecycle funds’
underlying growth and defensive assets has also
changed – a number have shifted from active to
passive management and have also turned away
from alternative assets in an effort to keep fees
lower, according to Chant West.
It remains debatable whether such a shift will
result in better retirement balances and assessing
the risk-return potential between such funds
remains beyond the ability of most investors.
“We overly focused on the word simplicity in
relation to MySuper because, to me, MySuper
is also about protection of the default member
and that’s where lifecycle comes in,” Facer says.
“It’s necessary complexity in order to protect the
Asset allocation remains just one tool to
manage risk – both volatility and the sequencing
risk that a major market downturn will decimate
an investor’s balance close to retirement. There
are a range of other portfolio risk management
tools, which vary widely among lifecycle funds.
CFS’ Tully says its Lifestage product may soon
include strategies such as low volatility equities,
tail-risk strategy and absolute return fixed interest.
“We fully expect that, not too far down the
track, we’ll introduce new strategies for the
portfolios, which look at risk through other
lenses than just diversification... those strategies
definitely aren’t cheaper than a plain vanilla long-
However, such strategies remain in the minority
across the industry and are not reflected in glide
paths or other simple risk assessment measures. It
is an issue currently being debated in the United
States (US), where the Securities and Exchange
Commission’s Investor Advisory Committee
recently recommended that a new standardised
risk measure be developed rather than asset
allocation – as shown by glide paths – which it
described as a poor proxy for risk.
US target date funds account for approximately
20 per cent or $US670 billion of the defined
contribution market and the number is growing
quickly, although a number performed poorly
through the global financial crisis (GFC).
However, Graeme Mather, leader of Mercer’s
Investment Consulting business, Pacific, says
lifecycle funds still performed their function.
“I can pretty much guarantee you that no
member that was in a target date fund that was
about to retire was worse off than had they
been in a 70:30 fund,” he says. “They suffered,
but everybody suffered during the GFC – some
members suffered worse than others within target
date funds and that was where the issue was.”
Striking the right risk-return balance for
disengaged members is an inherently difficult
task with a large margin for error. It must balance
behavioural biases that often result in members
switching to more defensive assets at the worst
time (following sharp market downturns and
so missing the following upswing), with the
likelihood that automated switches into defensive
assets will result in a lower final balance.
The United Kingdom has taken a different
approach with NEST (the National Employment
Savings Trust), which starts investors aged in their
20s with relatively conservative assets before
ramping up the growth assets in their 30s to 50s.
However, that scheme is voluntary and the strategy
is designed to keep young people invested.
Deloitte’s Facer says it is the same argument
that some local lifecycle funds use to justify
shifting investors into more conservative assets at a
relatively early age.
“Behaviour means we have to start bringing
those growth assets down so as not to cause a
member who gets a large negative return to be
entirely turned off growth investing or to make
a knee-jerk reaction.”
Nonetheless, Chant points out that, since 1980,
there have only been five instances where growth
funds have posted negative returns (1990, 1994,
2002, 2008 and 2011) and only one of those
resulted in double-digit negative returns (2008 when
funds’ lost 22.5 per cent after fees and taxes).
THE FINAL OUTCOME
A key rationale for MySuper was to lower fees.
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