Superannuation funds could top up lifecycle members' end savings by about 30%, if they make a "mid-step" switch to defensive equities instead of gradually increasing allocations to bonds, according to new analysis from Parametric.
Parametric's latest research is pitching the defensive equities (DE) option as a "sharper asset allocation tool" for lifecycle products which could yield impressive results: 18% higher annual income, 30% higher end savings for retired members, and 1% annual returns over classic lifecycle strategies.
"These are not small improvements and demonstrate the compounding benefits of executing a better-fit asset-allocation strategy over a long-term investment horizon," the researchers write.
The proposition? As fund managers look to increase defensive exposure as the member ages, they should pick defensive equities instead of bonds.
Defensive equities portfolios include equities that have low volatility and better down-side protection, and are a realm commanded by specialist managers, Parametric managing director research Australia Raewyn Williams said.
Traditionally, lifecycle investment portfolios go from 80% growth assets to 80% defensive assets over a 30-year period.
The classic lifecycle portfolio kicks off with 40% invested in the S&P/ASX 200, 40% in MSCI ACWI ex Australia and 20% in the Barclays Global Aggregate Bond Index (AUD).
Each year the fund managers pull out 1% from each growth asset class and put 2% towards bonds. As a result, at the end of 30 years, members end up with 80% in bonds.
Parametric's proposed DE option also begins with 80% growth assets but the 1% the manager pulls out each year from growth assets goes towards defensive equities instead of bonds.
As a result, at the end of 30 years, DE lifecycle members will have 60% in defensive equity and only 20% in bonds.
This "mid-step" DE allocation can mitigate the "rather harsh leap from" from equities to fixed income, the researchers argue.
Australia has seen an uptick in lifecycle retirement products, following at the heels of similar moves in the US and UK.
About 35% of total MySuper assets are currently held in lifecycle strategies, according to Rainmaker research. About 26% of MySuper products offer lifecycle investment strategies. Retail funds dominate the segments with a 67% share.
Even though the assets are mostly in retail funds, the interest from industry and corporate funds is growing, according to Parametric.
However, defensive equity portfolios are new everywhere in the world, according to Williams.
"We don't think of defensive equity portfolios in individual stocks as individual stocks don't always behave in a defensive way," Williams said.
If a super fund manager were to explore DE allocations for their lifecycle products, they would have to take money to a specialist manager, Williams says.
And could this be grounds for higher fees?
"The fees could go up or down, depending on where the money is coming from," Williams says.
"For example, if the manager is pulling money from bonds, the fees might go up but then so will the returns. However, if it is coming from active allocations the fees might remain the same or even go down as active allocations are expensive in Australia," Williams said.