What are the options?
Leaving self-managed funds aside, most Australians have their super in either a “balanced” fund or a lifecycle strategy. Regardless of age, members of balanced funds tend to have about 70 per cent of their money allocated to growth assets and the remaining 30 per cent in defensive assets.
The lifecycle approach uses age as the basis for determining exposure to growth assets. Members are divided into age cohorts (often based on the decade in which they were born) and exposure to growth assets is dialled down as the group grows older.
But that’s not quite the end of the story. Most super funds also offer a menu of investment options ranging from high growth to balanced and conservative. The categories vary according to their growth/defensive split. To make things more complicated, there is no standard definition of what split constitutes a balanced or growth option one fund’s balanced option might include an 85 per cent allocation to growth assets while another might contain 65 per cent growth assets. So it pays members to look under the hood.
Data from Commonwealth Bank-owned Colonial First State shows members switched investment options at three times the usual rate during March. Interestingly, nearly as many members switched into higher-growth options (2310 individuals) as those who switched to cash (2258 individuals).
“Our data showed that while we had many super members who were spooked by the volatility, there were just as many people looking to invest after the market had fallen,” general manager of investments Scott Tully says. “This suggests there are members who understand that super is a long-term investment but are prepared to take advantage of lower prices in the middle of a crisis.”
Not surprisingly, retirees were least likely to switch to growth assets. Along similar lines, pre-retirees (aged 50-64) were most inclined to switch to cash. Forty-five per cent of all switches to growth assets occurred among members aged under 49. Many advisers, however, warn against trying to time the markets as even the professionals can get it wrong.
The CFS data also shows that switches to growth were lower on average in dollar terms than moves to cash. The average switch to growth was $19,000 compared to the average switch to cash of $99,000, suggesting that moving to growth was more of a partial reallocation of members’ portfolios rather than wholesale change.
So what happened in lifecycle funds? Sunsuper is unusual among industry funds in that its flagship offering is a lifecycle product. That means the fund has made some important decisions about risk exposure according to age. But members can make choices, and during March a small percentage of the fund’s 1.4 million membersswitched investment options,with about $1 billion moved from balanced and growth investments to cash and capital guaranteed options.
“We also saw a very small number of members move into higher-risk balanced, growth and share options during the downturn to capture what they clearly saw as a buying opportunity,” chief investment officer Ian Patrick says. Since March, some members have reverted to their former options, including nearly $250 million which has been moved from cash and capital guaranteed to balanced and growth.
So what’s the right option?
Patrick agrees the 100-minus-your-age rule of thumb has some intuitive appeal. But ideally, he says, members choose a portfolio mix based on expert financial advice and according to phase of life, financial goals and personal risk appetite.
Under what are called intra-fund advice rules, most super funds can discuss members’ investment options. But unless staff are specially licensed, they are prohibited from giving personal advice, which tends to involve larger conversations about goal setting and assets outside super.
Hare tells clients their most valuable asset as a young person is time; time to take more risk by investing in higher-growth assets while knowing they can ride out the lows. While the default system largely tips people who don’t choose a super fund into 70:30 balanced options (Chant West calls these growth options, as per the table), Hare says people in their 20s, 30s and even 40s are wise to consider higher-growth options.
Pat Garrett, co-chief executive of robo advice firm Six Park, says there are three key factors to consider in determining growth asset allocation.
The first is investment time horizon. “Shares are growth assets, and share market ‘down’ cycles can last up to five years or more, so your investment time horizon is a big determinant of how much growth assets should be in your portfolio,” Garrett says.
The second is risk appetite. This is your willingness to accept the prospect of investment volatility and/or loss for the prospect of higher long-term gains. Behavioural economics suggests that many people have more trouble dealing with losses than enjoying gains.
Third is risk capacity. “This is your ability to sustain investment losses should they occur, given your personal and financial circumstances,” Garrett says. Retirees relying on their nest egg for income, for example, can tolerate only so much capital loss.
Garrett agrees that default balanced options may not be ideal for people with another 30 or so years to invest. Nor are they necessarily the best choice for those close to retirement.
“Check your fund to see what the mix is and, importantly, what is categorised as growth and defensive asset classes,” he says. “We’ve recently learned that some funds have categorised unlisted private investments as defensive, when in fact they are illiquid and quite risky, and so should be considered a growth asset class.”
Garrett says older-style lifecycle options tend to tilt to defensive assets too early in an investor’s life stage given people are living longer, although new-generation offerings are much improved. “Many of the earlier versions have not aligned with the ‘100 minus age’ rule of thumb, so check the asset allocation parameters.”
With longer lives, could it be that the “100 minus” rule of thumb should become the “120 minus” rule? It’s a debate for another day.
What are the options?