Morningstar - Q2 2023 - 22

Dispatches
Vanguard Joins
Super Wars
AUSTRALIA + NEW ZEALAND
Australia
Vanguard has joined the superannuation club
with its Super SaveSmart accumulation offering.
The launch gives it the ability to go headto-head
with the large superannuation funds, but
will it be able to compete with the likes of
AustralianSuper? Vanguard is a giant, with over
AUD 10 trillion of assets globally, but homegrown
AustralianSuper is sizable, too, with over
AUD 250 billion in assets.
Vanguard provides a range of investment
choices, but the default MySuper option is a
lifecycle option. Lifecycle funds automatically
adjust asset allocations as investors age.
For investors 47 years old or under, Vanguard
allocates 90% to growth assets, such as
shares and property. Beyond this age, Vanguard
starts to ratchet down this allocation and increase
defensive assets, which reduces risk but
can also lower returns. At 64 years old, investors
hold an even mix of growth and defensive
assets. The last milestone is 82 years and older,
when growth assets are down to 40%.
Vanguard's lifecycle product has been designed
to make systematic, gradual adjustments
to the mix of investments. The adjustment to
the investment mix ranges from 0.50% to
2.50% in any given year.
Lifecycle investing is a sound approach for
hands-off investors who want a professional to
monitor and adjust their investment mix
over time. In the United States, Vanguard
managed around $1.1 trillion in this style of product
at the end of 2022 compared with the overall
U.S. market of more than $3 trillion.
AustralianSuper's default choice is the Balanced
Option, so it isn't tailored to every investor's
time horizon. A 40-year-old investor might prefer
the AustralianSuper High Growth Option
(which has an asset allocation similar to that of
Vanguard's age 47 and under option) while an
22
Morningstar Q2 2023
Strategic asset allocation is part of
AustralianSuper's active investment approach.
It is generally harder to beat the market at
this sort of scale-AustralianSuper's size
is over AUD 250 billion-but to date, it has been
successful across a number of asset classes.
AustralianSuper has a lot of tools to generate
returns. For example, it allocates around
20% to unlisted property, infrastructure, and
private equity, and these investments have
been favorable over the years. Unlisted assets
tend to go up less in up markets and down
less in down markets, generally because they are
not revalued daily. The flip side is liquidity
risk, but a steady stream of inflows has given the
AustralianSuper team breathing room in
market downturns.
While Vanguard says it won't rule out adding
active strategies once it has scale and liquidity, its
current offerings are strictly index funds-
and Vanguard's track record as a low-cost index
provider is impressive. Active management
generally comes with higher investment
fees, and that is the case here. Vanguard charges
investment-related fees of only 0.23% on
its lifecycle option, less than half the fees on
investor in their 60s might be better served by the
AustralianSuper Stable Option. These funds'
investment mixes may shift over time. For example,
the AustralianSuper Stable Option targeted
58% in defensive assets in 2019 and was down
to less than 52% in 2022.
comparable AustralianSuper funds. Higher fees
make it harder to beat the markets.
Administration fees and costs count, too. On this
point, AustralianSuper has a significant scale
advantage. An investor with AUD 50,000 will pay
AUD 102 each year for AustralianSuper compared
with AUD 175 for Vanguard. But if Vanguard
is true to form, it will pass scale benefits through
to investors as the product grows.
AustralianSuper and Vanguard both offer
compelling options, and we're watching with
interest to see how they scale, set the standard in
terms of fee levels for investors, and evolve
their investment strategies. What will be even
more interesting to watch is how these two
investment powerhouses bridge the advice and
education gap for investors. Investors will be
best served by not only great investment solutions
but also a provider that can build a complete
picture-taking into account factors such as
principal place of residence, pensions, and other
investments-to help them achieve financial
security in retirement. If these two dynamos
can set the standard on this front, investors will
be the beneficiaries.
Annika Bradley is director, manager research ratings,
Asia-Pacific at Morningstar.
Vanguard's Lifecycle Option Reduces Risk Gradually
100%
80
60
40
25
Investor Age
Source: Vanguard.
35
45
55
65
75
82
Growth
Assets
40
Allocation to Growth Assets
https://www.morningstar.com.au/insights/author/3195/annika-bradley
Morningstar - Q2 2023

Table of Contents for the Digital Edition of Morningstar - Q2 2023
