High-growth, high-risk super funds top performance charts

Booming sharemarkets have pushed high-growth, high-risk superannuation funds to the top of the league tables. Rate cuts could see them fare even better in coming months.

Super funds that have high allocations to growth assets are outperforming balanced peers – at least for younger members.

Booming sharemarkets pushed high-growth, high-risk superannuation funds to the top of the league tables last financial year, as some notched up returns as high as 15 per cent – and this year could top that, with looming rate cuts a potential tailwind for market gains, analysts say.

The US Federal Reserve is set to kick off a rate-cutting cycle this month, with Australia to follow later this year or by early 2025. Amid expectations of a 25 basis point cut from the Fed following recent inflation data, attention is turning to the likely sharemarket reaction. If a soft landing comes alongside the rate cuts, equities could keep pushing higher, providing a further boost to super funds embracing risk and high allocations to equities. This is the case for markets both at home and overseas.

“There (are) tentative signs that activity levels have already bottomed, and that the prospect of rate cuts over the next 12 months will provide a tailwind for further market gains,” UBS strategist Richard Schellbach told ­clients.

But for the millions of workers in ‘‘balanced’’ options, including members of the $340bn mega-fund AustralianSuper, yearly returns could be muted by a more cautious allocation to defensives, at least in risk-on years.

High-growth lifestage super funds took out all top 10 spots for the best returns over the year to June 30, recording double-digit gains amid a higher allocation to risky assets, primarily equities, according to new research from ChantWest.

Lifestage funds, some of which allocate more than 90 per cent of a members’ savings to growth assets, have also outperformed their single-strategy peers over the medium and long term, according to research compiled by ChantWest for The Australian.

With allocations to growth assets well above 80 per cent, these top-performing funds are not included in the broader performance surveys put out by the big research houses each year. Those surveys typically only look at funds with allocations to growth of 60-80 per cent.

But amid a push for member growth, a tighter focus on performance, and Australians living longer – meaning nest eggs need to last longer through retirement – a cohort of super funds have been steadily pushing up the risk curve.

Australian Retirement Trust is the latest to make the move, with the $300bn fund shifting 1.4 million members from balanced to high growth, with an 85 per cent allocation to riskier assets.

The nation’s third-largest fund, Aware Super, made changes to its lifestage fund three years ago, dialling up the risk for younger members.

But crucially, this outperformance comes through only for younger cohorts. These funds, which de-risk as a member ages – usually starting between the ages of 50 and 55 – substantially underperforming for older workers. This could potentially lead to lower balances in later years.

Colonial First State’s Essential Super, a strategy offered through Commonwealth Bank, was the best of the lot over fiscal 2024, with a 15 per cent return for the 12 months through to June 30, driven by a more-than-90 per cent allocation to growth assets such as equities.

Another CFS strategy, FirstChoice Employer, took the second spot with a return of 14.9 per cent, followed by Vanguard’s Super Save Smart at 13.2 per cent.

But Australia’s biggest lifestage funds – ART and Aware Super – failed to make it to the top 10 at all. (Both recorded returns above 10 per cent and ART’s move to shift members up the risk curve is likely to see it among the sector’s top performers in risk-on years.)

Overall, lifestage funds came out on top for younger workers on a one, three and 10-year basis to June 30, according to ChantWest.

But these strategies fall far behind single balanced or growth offerings for older cohorts.

For someone aged 35, eight of the top 10 funds over three and 10 years are lifestage funds. But there is a dramatic flip for retirees, with the top 10 funds for 65-year-olds all single strategies.

Over 10 years, mega-funds Hostplus and AustralianSuper take the top spots for this cohort, with average annual returns above 8 per cent. AustralianSuper, meanwhile, returned 8.5 per cent over 2024 for the millions of members in its default balanced option, due to a 30 per cent allocation to defensives such as fixed interest and cash.

USB strategist Richard Schellbach. Picture: Emma Murray

With lifestage funds derisking substantially in the later years, to have growth assets of roughly 50 per cent, returns are weaker at a point when members have higher balances, meaning they miss out on the compounding benefits higher-returning single strategies deliver for older members.

“For younger members, in most market conditions, where markets are going up and equity markets are doing pretty well, then it does pay off to be in a life cycle (lifestage) fund, because you’ve got more exposure to growth assets, and so you’re going to get a better return. So for age 35 the life cycle strategy gets a big tick,” ChantWest general manager Ian Fryer said.

“But if you look at age 65, it goes the other way. Every single product in the top 10 for the age 65 cohort is a single option MySuper; there’s no lifecycle in there at all. And that makes sense, because the lifecycle products go much more conservative: 53 per cent growth assets is the median growth assets for the lifecycle products, whereas the single options stay the same, with 72 per cent in growth assets,” he said.

While some retirees would benefit from a higher defensive allocation and lower volatility, others would be better with more invested in growth assets, Mr Fryer warned.

“If you’re someone who hasn’t got much in super and, say you have a mortgage, you may want to take your retirement funds and pay that off. In that case, you don’t really want your investments jumping around too much,” he said. “But if you’re someone who is going to be living off your account-based pension for the next 20 years, your investment horizon is actually pretty long. So maybe it should be invested at 70 per cent.”

With lifestage funds embracing risk for younger members, Mr Fryer said he expected these funds to dial up the risk for older members too, lifting growth assets for retirees from the current median of 53 per cent up to around 60 per cent, to get the benefit of higher returns.

CFS chief investment officer Jonathan Armitage said lifestage funds protected against sequencing risk.

“In constructing these lifestage cohorts, we are ensuring that people have an appropriate asset allocation as people move towards retirement. It provides a degree of defensiveness in terms of the asset allocation,” he said. “It also avoids sequencing risk, which is where someone has a very high allocation to either growth assets or illiquid assets (at or close to retirement) and there’s a significant downdraft in valuations.”

But there was a trade-off to the lower risk, Mr Fryer warned.

“The later years are when you get more bang for buck from your performance. That’s actually the time where, if you can get a higher return it’s so much better, because you (build on) a higher balance.”