AMP Capital is on the campaign trail for lifecycle investing – its chosen default for MySuper.
This is not for the faint of heart, as Sean Henaghan, chief investment officer and director, multi-asset group at AMP Capital well knows. He is often jolted by a knee-jerk hostility to any debate on the idea lifecycle might be better than balanced funds. The debate is a challenge to what the industry is comfortable with and to the way it benchmarks itself through balanced fund returns.
Upping the difficulty factor for Henaghan is a lack of a track record and transparency on the performance of lifecycle.
With such prejudice and burden of proof, Henaghan hears about potential customers’ dislike of being put in at the top end of a 10-year cohort when there are others much younger than them in it, or vice versa. A balanced fund does not pretend to cater for different age groups, and so side steps the more glaring question of why a 25-year-old and a 60-year-old have the same investment strategy.
Furthermore, while AMP Capital already has $4.8 billion invested from clients in its default glide path strategy, much of it was won on the strength of its client service and investment capabilities; no employer clients choose to place business with AMP Capital solely because they are passionate believers in the idea of lifecycle being superior to a one-size-fits-all balanced fund. Indeed, AMP Capital will occasionally lose a pitch for business because the client is not convinced by a lifecycle proposition.
And yet, one of the curious things about the debate, is how evangelical are those that have moved to a lifecycle or cohort strategy, and how the more they practise it the stronger their faith gets. Brad Holzberger, chief investment officer of QSuper is a good example, but Henaghan runs him close. It is as if once you have tried lifecycle, you will never go back to balanced.
Henaghan sets out the case for prosecution against balanced funds.
“If you are managing a balanced fund you are constrained by how much you can take out of equities, because you cannot be categorised as a balanced fund if you have less than 60 per cent in growth assets. Secondly, if you [do decide to] reduce your equity weighting, you will incur quite significant track error to your peer group – and if then you end up in the fourth quartile, that creates some real business challenges.”
Such business pressures take the focus away from what is best for the member, says Henaghan.
He also has a point about balanced fund reporting and lifecyle funds communicating. For example, a balanced fund that falls 10 per cent in value can tell members it has fallen less than its peers who on average fell by 11 per cent. A lifecycle fund will instead have a message to individual members about what the fall in value means for their retirement income and the increased contributions or later retirement date they can choose to put that right. Clearly, that would not be a welcome communication, but it would be a mature one.
“This is about trying to get members engaged, and as an industry we have done a really poor job of that,” says Henaghan.
Big market falls pose another tricky communication scenario for the youngest cohorts who are in 98 per cent growth assets. In the early years, this high-risk strategy should do better than a balanced fund over time, but it is risky given how some members are easily spooked. One new idea for the younger cohorts that Henaghan is exploring is the use of thematic approaches to equities. This plays to the strengths of younger members by using a bias towards stocks that will benefit from long-term plays such as demographics or global warming.
The story for the later cohorts is much more convincing. Here, AMP Capital talk of a bold use dynamic asset allocation for larger balances and for those close to retirement. Again, the focus is supposed to be on what is best for the member – taking risk off the table when not being rewarded for it and loading up regardless of benchmark when it is.
This is all a good debate for the industry and one that should be had openly and without hostility.