Where your super is invested for your stage of life

All things going well, your superannuation should be ticking away in the background. The classic "sleep at night" investment where your employer is contributing on your behalf due to the mandated superannuation guarantee of 11% of your salary.

But do you know what that actually looks like and how your super fund is investing your future retirement pool?

Superannuation options are typically multi-asset (equities, property, cash, commodities, alternatives) and multi-strategy. There are large investment teams working on your money - both internal to the superannuation fund as well as external partners that the super fund might identify to use in the investment mix.

Due to the long term nature of these investments, they can seem slower moving than many of the actively managed funds we regularly discuss on Livewire - but in this case, it's necessary. You also won't typically find superannuation funds telling you they are value or growth managers - because they don't focus on one style. For them, it's about what blend of styles will give investors the best long term retirement outcomes.

In part 1 of this mini-series on super, I looked at how to evaluate your super. In part 2, I'll explore where your money is invested with Michael Winchester, Head of Investment Strategy at Aware Super and James Kerr, Head of Asset Allocation for Mercer to learn more about how they invest for different super options.

How your money is managed can vary based on option and stage of life

Superannuation is one of the longest-term investments you’re likely ever to have, carrying you from your first job, all the way beyond retirement. Just as there’s no perfect fund for every Australian, the perfect option for you will likely look different at 20 compared to 65.

The reason for this comes down to your investment horizon.

In your 20s, you’ve got decades to weather financial cycles and grow your money. In your 60s, you might be thinking about drawing down some of your super for a pension – but you still need to grow for decades. After all, the average life expectancy for Australians is 83.2 years and your superannuation is likely to be a significant portion of your income in that time.

“The biggest factor members have at an early age is time horizon. They can afford to take risk, they can afford to accelerate capital growth and focus on differentiated strategies. This drives them into the equity or growth asset portion of the marketplace to drive that capital growth and build a foundation investment,” says James Kerr, Head of Asset Allocation for Mercer.

“When they come into retirement, they might need to be more sensitive around risk. Capital drawdowns might be something they need to keep in mind and the base level of real return they need for a real income outcome through retirement.”

Michael Winchester, Head of Investment Strategy at Aware Super, notes that it is therefore important to monitor whether you are in the right risk profile option for your superannuation.

“I’d suggest that investors look at where their super is being invested at the moment and try to understand if they are taking the right amount of risk for their lifestage,” he says.

Younger investors are more likely to be in high growth strategies to maximise returns – it’s not necessarily where you want to be at retirement.

“As members get closer to retirement and managing risk, we start to introduce more diversification to manage downside risks in our default lifecycle super options and help their balances become more resilient to market volatility,” says Winchester.

The type of growth and defensive assets might also look different based on option too. 

For example, a conservative portfolio might incorporate gold as an inflationary hedge in the defensive component of the portfolio and use more consistent income earners, such as utilities in the growth equities allocation. By contrast, a high growth strategy might be use equities that have a higher risk component to them, such as tech companies, in the growth allocation as well as potentially considering less liquid investments like venture capital.

Lifecycle superannuation investing

Both Aware Super and Mercer offer lifecycle default superannuation funds alongside traditional options such as conservative, balanced, growth, high growth strategies.

What this means is that the fund is designed to adjust its allocations over time based on your age group. Your money is pooled with others at a similar point of life. 

"When you come into the workforce, the asset allocation for the Mercer lifecycle default option will be relatively high risk to about 90% growth assets," says Kerr.

He notes the asset allocation shifts to around 60% growth assets at retirement for most members in the lifecycle product set.

The focus on high growth for younger members is shared by Aware Super. Winchester says the target allocation is 88% growth for members aged under 55 years.

"It's 88% in growth assets like shares, private equity, property and infrastructure. Diversification for younger members is about making sure they've got the broadest exposure to economic growth that they can get. 

From about 55 years onwards, we start de-risking members, introducing more cash and fixed income because managing economic cycle risk becomes more important. At 65, the portfolio is 57% in growth assets and 43% defensive assets," he says.

How superannuation funds invest your money (and where they are watching)

Superannuation options are generally framed by names like 'growth', 'balanced' or 'conservative'. What these refer to is asset allocation of growth and defensive assets. For example, a balanced portfolio might have 70% growth assets and 30% defensive, while a growth portfolio might have 90% growth assets compared to 10% defensive.

Unlike the actively managed funds you might invest in outside of superannuation, this asset allocation won’t shift much – it’s a mandated part of the strategy and these are very long-term investments. Superannuation options are also typically multi-asset (equities, property, cash, commodities, alternatives) and multi-strategy.

The type of growth or defensive assets selected might vary depending on the strategy.

A growth portfolio might focus the bulk of its growth allocation into equities, whereas a conservative portfolio might have a blend of equities, property and liquid alternatives to offer more protection in volatile periods.

What you might see shift is tactical decisions within these growth and defensive allocations off the back of market activity and cycles.

“We stick closely to our long-term targets. There may be some active trading around the edges. Our macro team has been actively trading both overweight and underweight positions in equities as well as bonds.”

Currently, we have a small overweight to equities, we have a small bias to Australian fixed income versus US fixed income, but those positions are pretty dynamic and they’ll change fairly regularly based on the assessment of what’s priced into markets,” says Winchester.

Mercer has also been dynamic in their approach to equities and fixed income, with a view that the growth outlook is modestly positive.

“We are slightly favourable on emerging market equities given better growth prospects and cheaper valuations relative to some developed markets. We’re less bullish on developed markets and are underweight in this space, particularly the US which is highly concentrated in the tech space,” he says.

He views the resetting of interest rates globally as improving the outlook for defensive investors and fixed income assets.

“Duration has now come back and diversified investors can get some hedging protection out of bonds. Duration and fixed income assets are looking more attractive and that’s putting pressure on equity returns. The equity risk premium is still very narrow compared to fixed assets,” says Kerr.

What the super funds want you to think about

Winchester encourages investors to be engaged and get involved with their super as early as possible.

“Your super is your money and you should engage with your super fund to make sure it’s invested appropriately for you. The sooner in life you do that, the better it is for your long-term investment goals.”

And when it comes to how you think about your superannuation, Kerr suggests cutting out the noise by focusing on your time horizon and how different investment assets work in different environments.

“Understanding the cycle and the longer term nature of asset returns really focuses you on the time horizon, how you can improve the compound outcome of your investment and trying not to time the markets on a short-term basis.”

After all, some of the biggest trends of our times are slow moving and you need to stay the course to make the most of them.

Need help evaluating your super fund? Find tips from Superratings and Superfierce in this wire.