Top 10 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, the success of super over the past 10 years in building wealth means members feel the bumps more when markets fall.

“Prior to COVID-19, we saw the industry average account balance rise over $100,000, compared to around $30,000 during the GFC,” says SuperRatings executive director, Kirby Rappell.

“This means that, on an absolute (dollar) basis, members will see their balance move around a lot more than they have previously.”

That was certainly the case after markets fell off a cliff in February 2020, when worried fund members checked their accounts and were shocked by their dollar losses even more than the percentage loss.

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 has also published the top 10 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 10 Balanced Index options over 7 years to 30 June 2020 ranked by risk and return

Source: SuperRatings. Returns to end June 2020. Risk and return ranking based on Sharpe ratio.

The risk-return trade-off

For the second year running, QSuper delivered the best return to risk ratio of its peers over seven years to 30 June 2020. For more on the measurement of risk and returns, See SuperGuide articles Risk and returns, getting the balance right and What is the Sharpe ratio and why is it important for your super?.

What pops out of the table above is that although QSuper topped the list, its 8% average annual return over seven years was not the highest. CareSuper, Cbus, VicSuper and AustralianSuper all delivered higher returns over this period, but they did so at a slightly higher level of risk.

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 are able to 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 10, 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 – there is a wide variation in how they invest members’ money. The funds with the highest returns over seven years tend to allocate 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 – 32% as at June 30 in its Balanced option compared with an average of more than 50% among its peers.

The difference is made up of around 23% in long duration bonds that have equity-like risk but offer better returns than traditional bonds when equity 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 equities, 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, QSuper has been winning industry plaudits. It won Chant West’s 2020 award for Best Fund Investments along with top gong for Pension Fund of the Year. SuperRatings also named QSuper Pension Fund of the Year for 2020 and the winner of its Smooth Ride award.

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.