Scott Tully, chief investment officer of Colonial First State, explains the logic of his default fund’s lifecycle approach to Investment Magazine.
Two years ago, Colonial First State introduced the lifecycle portfolio in response to MySuper requiring super funds to offer a single default option for all members.
Scott Tully, chief investment officer at Colonial First State, defines the lifecycle approach as one where members are differentiated based on some broad element, such as account balance or gender.
“We felt that age was probably the most descriptive way of categorising our members, but more importantly we felt it was a much better approach than having a single balanced fund for everyone,” he says.
Younger members have a higher exposure to risk assets, but as they move closer to retirement the exposure lessens.
This decision was taken on the basis that if a member was in the lifecycle portfolio through their entire working life, they should get a very similar outcome to being in a balanced fund, but the volatility at various points will be different.
“We are not saying it will be a better or worse end result, necessarily, but we are saying the volatility for members is better matched at different stages through their working life,” Tully says.
He reasons that if a member who is getting close to retirement has a bad investment experience they may panic and go to cash, thereby crystallising losses. Alternatively, they may have bad timing and suffer from sequencing risk. This makes it prudent to decrease volatility in the late stages of a working life.
The criticism of this approach is that people now live far beyond their retirement age, so therefore should be taking some risks to grow their capital in retirement.
“Our view is that when you get to retirement you reassess these things. You can set your risk profile and your cash flow requirements that are relative to retirement. But if you haven’t been thinking about these things leading into retirement, then volatility is not something that is going to be welcome.”
“Other people say ‘Well you’ve got 30 years to your life expectancy and therefore you’ve got 30 years’ investment experience that you can go through’, but I think that’s a little bit naïve about how people actually deal with their personal affairs around retirement.”
The lifecycle option has proved popular, with Colonial First State offering lifecycle through two channels; one is the FirstChoice platform and the other, Commonwealth Essential Super.
Disparities in gender
Tully believes lifecycle approaches have the potential to help address gender inequality in account balances.
“You have more flexibility under a lifecycle approach to start doing that. Ultimately, it would need to be addressed at the member level, because it’s very hard to build a broad solution that addresses all the nuances of the individual, but you could have a structure that allows for gender.”
On a similar note, Tully is fervent that gender diversity in this industry needs to be improved.
“We’ve got a good mix of men and women in our investments team and I don’t see that in a lot of other places,” he says. “It is a failing of our industry that more women haven’t come through. I’m not saying that gender diversity solves the problem with the members’ experience, but it is a related issue.”
Tully adds that another benefit of diversity, whether with gender or culture, is it makes a better working environment, generates a better mix of discussions and brings into account different thematics.
“If you have the team all coming with similar backgrounds and experiences, it might still make good decisions but it won’t necessarily bring quite the same breadth of understanding to the decision.”
Colonial First State has been running multi-manager portfolios since 2002, with $34 billion in funds under management. This includes a lower cost range of portfolios established to meet the demand from clients and advisors of having a low-cost option that wasn’t passive.
These portfolios have been constructed around a capability it calls Realindex, which identifies the fundamental value of a stock and builds an index around that. The intention is to outperform regular market cap benchmarks, but in a way that has the advantages of passive, such as reduced turnover and broad diversified holdings.
“So we built multi-index to provide to clients a lower-cost solution while still retaining active management. This has proven to be quite popular and has been used by advisers who are perhaps adding some more active components to our portfolios, but still having that core exposure where we are looking after the portfolios for them.”