The MySuper Default Option: Assessing Portfolio Diversification, Suitability for Contributors and Performance of Superannuation Investment Strategies - SUP005
According to the Federal Government, MySuper is “a new low cost and simple superannuation product” that will provide a “single diversified investment strategy, suitable for the vast majority of members who are in the default option.” As more and more MySuper products are approved by the regulator (APRA), this study seeks to explore the level of diversification of the various MySuper products and their suitability for investors.
The study is the first in its kind to employ the diversification delta, a new measure of diversification, to explore various Mysuper products and their suitability for investors. The study will also focus on the performance of MySuper Products when a contributor is close to retirement and his or her capital base near its maximum, comparing it to a more conservative investment approach with less risk.
The research found that the new measure of diversification, the Diversification Delta based on the empirical entropy as suggested by Vermorken et al. (2012) has a number of shortcomings and is not appropriate to actually monitor diversification of portfolios where risky equity assets are being combined with less risky assets such as bonds or bank bills (a typical combination for superannuation funds). Hence the findings also suggested revised, more appropriate revised measure for diversification. In an out-of-sample analysis, created Diversification Delta-optimal portfolios outperform Sharpe Ratio-optimal portfolios by creating higher average returns with lower standard deviation
The research continued to conduct comprehensive analysis of the different factors that affect the wealth at retirement of an individual superannuation investor, mainly focusing on the contributions and performance of the portfolio over the last 10 years before retirement. It is found that contrary to the common belief, lifecycle strategies which switch from growth to defensive assets as an investor approaches retirement age do not necessarily outperform more aggressive strategies when considering risk-adjusted performance measures. On the other hand, large differences in the performance of different strategies exist with respect to the probability of reaching a high outcome at the retirement age. Furthermore, after testing different contribution levels and salaries, it is found that increasing a mere 2.5% in the contribution level has significant impacts on the probability of reaching or exceeding the required amount for a comfortably lifestyle according to the Association of Superannuation Funds of Australia (ASFA).
This research has also been presented at:
Macquarie University Academic to Business Symposium
Sydney (November 2014)
6th Australasian Actuarial Education and Research Symposium
Sydney (December 2014)
The University of Sydney Research Seminar - Retirement Wealth Outcomes for Superannuation Portfolios - A Risk-Adjusted Analysis
Sydney (May 2015)