Top 20 Balanced super funds ranked by risk and return

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While super is a long-term investment, short-term fluctuations in the value of your super account can set the pulse racing, and not in a good way. This is especially so for members close to or recently retired and those with a large account balance.

According to super fund ratings and analysis group SuperRatings, until the COVID-19 pandemic hit, global markets had been on an upward trajectory since the depths of the GFC over a decade earlier.

“People had become used to returns but not the risk,” says SuperRatings executive director, Kirby Rappell. And it’s not just older members having to adjust.

“The market crash in February 2020 would have been the first time younger investors experienced such a significant and sharp fall in their wealth. Increasingly, investors are acknowledging the importance of not only the return that an option delivers but also the level of risk it takes on to achieve that return,” says Rappell.

He says one way to examine this is looking at the ups and downs in returns over time. “Growth assets like shares may return more on average than traditionally defensive assets like fixed income, but this comes with a bumpier ride.”

While younger investors can afford to take a long-term view, it’s still important to understand the risk and return trade-off along the way.

Taking account of volatility

For this reason, along with the usual lists of top funds rated by their investment returns over various time periods, SuperRatings also publishes the top 20 Balanced options over seven years, ranked by risk (volatility) and return.

Why does this matter?

Well, in volatile markets a super fund that provides a smoother investment journey is likely to be attractive for people who want to earn a decent return and still be able to sleep well at night.

Top 20 Balanced Index options over 7 years to 31 December 2021 ranked by risk and return

Source: SuperRatings. Returns to end December 2021. Risk and return ranking based on Sharpe ratio.

The risk-return trade-off

QSuper continued its winning streak, delivering the best return-to-risk ratio of its peers over seven years to 31 December 2021.

What pops out of the table above is that although QSuper topped the list, its 7.6% average annual return over seven years was not the highest. All the remaining 19 of the top 20 funds delivered equal or higher returns over this period – AustralianSuper, Hostplus, Sunsuper for Life and Cbus all returned more than 9% – but they did so at a slightly higher level of risk. While the top 20 performing Balanced options all returned 13.9% or more in the year to December 2021, members should not expect such stellar returns to continue.

Rappell says the funds that feature in this table are often those with older member demographics and higher average account balances. These funds are more likely to have lower allocations to risk assets than funds with younger members who have time to ride out market highs and lows before they retire.

Even so, it’s pleasing to see that funds can deliver a smooth investment journey as well as excellent returns. The typical long-term return objective for balanced super funds is to beat inflation by 3% to 4% a year. This has been achieved comfortably by the top 20, with inflation averaging below 2% a year over the past seven years.

QSuper strategy pays dividends

Although super funds may have similar looking investment options – in this case they are all Balanced options (60–76% growth assets) – there is wide variation in how they invest members’ money. The funds with the highest returns over seven years tend to hold a higher proportion of members’ savings in shares.

In the wake of the GFC and the heavy losses sustained by investors during that period, QSuper adopted an approach to risk designed to cushion the blow for members in bad years.

While it has a meaningful allocation to unlisted assets, to further smooth out returns it has a much lower allocation to listed equities than other super funds – 38% as at 31 December in its Balanced option compared with an average well above 50% among its peers.

The difference between QSuper and its peers is a significant allocation to long duration bonds that have equity-like risk but offer better returns than traditional bonds when share markets fall. The aim is to provide a smoother ride for members.

In addition, QSuper’s lifecyle MySuper fund adjusts investment risk according to a member’s age and account balance to provide a smoother glide path in the run-up to retirement.

Retirees lose appetite for risk

While there is no single best approach to investing, some strategies outshine others during certain phases in the investment cycle.

Rappell says QSuper’s approach has worked very well while interest rates have been tracking down. And because it has a lower allocation to shares, it was not as affected by recent sharemarket volatility. This is especially important for pension members and those nearing retirement who can’t afford a downturn.

For these reasons, as well as the launch of its Lifetime Pension product in March 2021 to reduce the risk of outliving your retirement savings, QSuper has been winning industry plaudits. It won SuperRatings’ 2022 award for Pension Fund of the Year for the fourth year running as well at its Smooth Ride award. It also won Chant West’s 2021 award for Innovation.

Given the challenging outlook for investment markets and people’s lack of appetite for volatility as they approach retirement, providing a smooth ride is likely to remain a big consideration for super funds and their members.

“Funds have done an excellent job of both managing risk and educating their members on these issues, but more can be done in this space,” says Rappell.