How to copy the best super funds

Picking the best possible superannuation fund is always difficult so there is no point getting depressed if yours doesn’t make the annual top ten list.

However, even as a private investor, it can be worth picking apart the methodology of the leading growth funds to see how they achieved what turned out to be some fairly impressive double-digit performances for the 2022-23 financial year.

So, what were some of the trends that led to these excellent results?

Well, it is no surprise that any funds that had an outsize exposure to offshore markets in general and to large technology stocks in particular had a really great year.

On Chant West’s numbers, global shares returned an impressive average of 18.3% for super funds, while Australian equities lagged but were still strong with 14.4%.

That was particularly the case for small industry fund Mine Super, which delivered a truly impressive 12% growth fund return for its members, who are mainly coal miners or those who work in similarly high-risk occupations.

Not far behind was Vision Super with 11%, Brighter Super with 10.6% with two of the really large funds – UniSuper with 10.3% and the Australian Retirement Trust 10% – also putting in very strong performances.

Offshore exposure is essential

One of the common factors from the leading funds was that they all had fairly extensive exposure to offshore markets – something that many investors with a home-market bias tend to ignore at their peril.

The importance of this in the past year was even stronger than usual, with the large technology companies that have a heavy presence on the US market in particular having a really excellent year.

Offshore share exposure is quite common in growth funds and on Chant West figures that saw a median return of 9.2% for the financial year.

That means funds were making up for poorer years, in general performing better than their long-term objective of around 6%, although it should be noted that with inflation spiking, the returns were not as great as they looked in real terms.

That is particularly the case given that funds try to get a return that is 3% to 4% above inflation over a decade.

Cash becoming more important

Having been the forgotten asset class during the pandemic when interest rates reached a negligible 0.1% in Australia, cash made a really important return in the past year.

In super funds, cash returned a relatively strong 2.9%, while bonds were fairly flat, with local bonds returning 1.2% while international bonds dropped 1.2%.

Many experts are predicting better result on the horizon for bonds, which can rise in value quite quickly if interest rates start to fall, so this will remain an important asset class for superannuation funds.

Infrastructure keeps paying the bills

Once again, infrastructure was a really good sector for super funds, with most unlisted investments returning low double-digit returns.

International listed infrastructure didn’t fare as well, falling by 2.8% and private equity was also down after providing stellar returns for a couple of years.

The listed versus unlisted debate will be an interesting one to watch in the coming year with prudential regulator APRA having recommended that superannuation funds value unlisted assets quarterly and even more regularly during periods of market volatility or big policy change by governments.

APRA has also recommended the use of blackout periods around each revaluation period which would stop super fund members from switching in and out of these unlisted investment options while they are in the process of being revalued.

This is a live issue given that super funds have around $650 billion tied up in unlisted assets and that sometimes if unlisted assets are yet to be written down or up, it can lead to unfair results to super fund members who remain in the fund or leave it.

Unlisted versus listed can change things up

Nowhere was the listed versus unlisted divide more obvious than in the real estate returns of the leading funds.

Australian listed property was up about 7.5% while international listed property was down 5.9%.

Unlisted property also finished down for the year, perhaps showing the effect of “smoothing” returns compared to the listed sector – something that might change a little if valuations become more frequent.

Big industry funds setting the pace

Looking at the long term, big industry funds continue to dominate returns for growth options over 10 years.

Hostplus was the best performer with returns of 8.9%, followed by AustralianSuper (8.6%), Australian Retirement Trust and UniSuper (both 8.4%), and Cbus (8.3%).

For the private investor, this is probably a good example of the importance of keeping costs down, with the larger funds able to use their greater scale to reduce administration and investment costs per member to much lower levels.

Similarly, the private investor can keep costs low by ensuring they use a cost-effective ETF or LIC and keep brokerage costs and trading churn low.