Who's in the winners' circle?

This financial year ending July 1 is on track to be the third in a row in which the typical balanced investment option will return more than 10 per cent. Super funds' balanced options are those that spread the money between asset classes. They are the options where most people have their super.

However, fund members should not pay too much attention to the 12-month returns. After all, fund members save for their retirement over decades, not one or two years, and they continue to invest for the long term, even in retirement.

Over short time frames, depending on the market cycle, particular funds can be favoured temporarily. That is why Money prefers to show SuperRatings' performance data for the past seven years.

During this period, the winners' circle includes industry funds, such as REST and CareSuper​, public-sector funds such as UniSuper​ and corporate funds such as Telstra and the Commonwealth Bank.

Few funds are able to outdo UniSuper's accumulation Balanced option for consistency of returns. UniSuper is the not-for-profit fund for workers in the higher education and research sectors.

The option has produced a return of 15.8 per cent for the year to March 31 to take second place. That is no flash in the pan. It has an average annual return of 14 per cent over the three years to March 31 this year, which puts it in first place. It produced an average annual return of 9.7 per cent 5 five years to occupy third spot and 7.1 per cent over seven years to take third place.

A large part of the success in the past couple of years is that the fund has maintained its bias to quality Australian shares that pay tax-effective dividends, says the chief investment officer of UniSuper, John Pearce.

Although balanced options spread the money between the asset classes, typically about 50 per cent of the money is invested in Australian and international shares.

Yielders pay off

Pearce and his team held steady, despite the view among some investment analysts that now is the time to rotate to the cyclical shares. These are the companies in sectors whose earnings respond strongly to improving economic conditions, such as the retail and media sectors.

"What has served us very well is clinging to the yield theme and that means being overweight to the banks, A-REITs [Australian Real Estate Investment Trusts] and the likes of Telstra," Pearce says.

Most asset classes have been working well for fund members for the past three years. That includes Australian shares, whose prices were flat during 2014, but have risen strongly so far this year.

The banks and Telstra have continued to give dividend yields of 6 and 7 per cent after franking credits. Since July 2012, Australian shares, including dividends, have produced a cumulative return of about 20 per cent. The tables show that the funds' specialist Australian shares options have also been making hay.

Over seven years, Perpetual WealthFocus​ – Perpetual Industrial Share Fund is in first spot with an average annualised return of 9.5 per cent. MLC MasterKey – MLC IncomeBuilder is equal second with Hostplus – Australian Shares with 8.2 per cent.

Overseas shares best

International shares have done even better during the past three years, with a cumulative return of about 30 per cent since the middle of 2012.

There is more than one route to investment success. Some funds have done well by reweighting their portfolios away from Australian shares to international shares.

A case in point is Kinetic Super. The industry fund has its origins in the recruitment industry, but is now  "public offer", meaning it is open to anyone to join.

The fund's growth option, which is its balanced option, where most members have their super, produced an average annual return of 9.6 per cent in the past five years, which ranks it number six.

Overseas shares do well

With the growth option, the aim is a long-term strategy focused on providing the best retirement outcomes for members, says Kinetic Super's chief investment officer for the past seven years, Paul Kessell.

The typical allocation of balanced investment options to Australian shares is about 30 per cent, with about 20 per cent to international shares.

However, the investment option has about 20 per cent of the money in Australian shares and 30 per cent in international shares. That may not seem like much, but among super-fund investment professionals, it is regarded as a big tilt.

Five years ago those percentages would have been reversed. The fund has about half its exposure to shares in index funds – those whose returns match or mirror the returns of the market and whose management fees are very low.

The other half of the exposure to shares is managed by active managers – those who aim to outperform the sharemarkets in which they invest. unds that have kept their currency hedging levels of their international shares exposures to 50 per cent or less, such as Kinetic Super, have done extra well.

Hedging foreign currency exposures back to Australian dollars removes the exchange rate risk, but when the Australian dollar weakens against major currencies, such as the United States dollar, for example, it pays to be unhedged or substantially unhedged, as the weaker Australian dollars increases the returns on overseas shares.

The table of overseas share options shows CareSuper – Overseas Shares is the best performer over seven years, with an average annualised return of 9.3 per cent. Second place is shared by Equip Corp – Overseas Shares, Telstra Super Personal Plus – International Shares and Virgin Super Plus – International Shares, with a return of 7.8 per cent.

Patience rewarded

The strongly performing, $30 billion, 800,000-member HESTA​ industry fund is a "long-term and patient investor", says chief executive Debby Blakey.

"We have a strong view that we are prepared to give up some return in strong equity markets. When markets are going very strongly, we are prepared to give up some of those returns, so that when markets are weaker, we have protection for our  members.

"At times, when there are strong equity markets, we may not be in the top quartile [top quarter of performers], but it is a very strong view of ours that it is in the down markets that we really want to protect members," she says.

That aim to smooth out the ride for members is borne out by the numbers. For the past year, the Core Pool, its balanced option, returned 13.1 per cent, which puts it just about the middle of the pack among the large super funds.

During the past seven years, Hesta's Core Pool has produced an average annual return of 6.4 per cent, which puts it in equal seventh. 

Retail funds among winners

Among the retail funds, those that are part of for-profit sharemarket-listed companies, Aon Master Trust's Balanced Growth – Active option is a strong performer.

In one year, it returned 15.5 per cent to sit in fourth spot. It has produced an average annualised return of 13.7 per cent over three years to be in third place and an average annualised return of 9 per cent over five years to be in the top half of the tables.

The chief investment officer at Aon Hewitt, Janice Sengupta, is pleased with the performances, but fund members need to take a long-term view of superannuation, she says. They must look beyond short-term performances, because super is a lifetime investment.

The fund is managed with a strong focus on risk management, she says.

CareSuper is another of the large industry funds that deserves a special mention. Its balanced option had an average annual return of 6.9 per cent over the past seven years, putting it in fourth place for that time period. It places in the top half of the pack of large super funds over one year.

Outlook for super is strong

The conditions of investment markets that have helped super funds produce almost three financial years of more than 10 per cent growth are likely to continue. Investment experts say interest rates are likely to remain low around the world for the foreseeable future, which bodes well for strong returns on sharemarkets.

Interest rates in Australia, which are already at record lows, are expected to be cut even more by the Reserve Bank. The Australian dollar could fall further, which would boost the returns from the overseas shares held by the funds.

Listed markets, particularly sharemarkets, are the main drivers of balanced investment options, says the co-founder of researcher Chant West, Warren Chant. About 50 per cent of the typical balanced option's money is invested in Australian and international shares.

In the middle of last year, most investment experts were expecting a more subdued return after the very strong returns of the past two financial years. "However, markets have proven to be more optimistic, even in the face of a patchy economic backdrop," he says.

The yield theme of the Australian sharemarket will continue, believes the chief investment officer of top-performing fund UniSuper, John Pearce.

He is referring to the theme where investors who earn next to nothing in interest on term deposits are buying the shares of the big dividend-paying companies.

"The biggest macro theme that has been influencing [the] market over the past five years is this whole concept of financial repression. It is the central banks driving down real interest rates and I do not believe that the bulk of the equity analysts have been recalibrating their models to take account of this."

He does not believe the shares prices of the big yielders, which include the big banks and Telstra, are too expensive as claimed by some equity analysts. "Quite frankly, I do not know if we are closer to the end or the beginning [of the yield theme]," he says.

@jcollett_money