In this episode, we look at the top shares of Australia’s best performing super funds, and our equity analysts’ outlook for the stocks.

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Mark LaMonica: Welcome to another episode of Investing Compass. Before we begin, a quick note that the information contained in this podcast is general in nature. It does not take into consideration your personal situation, circumstances, or needs.

Shani Jayamanne: So we’re going to do an episode that we haven’t done in a while, which is an episode on shares.

LaMonica: And mainly, I think we’ve gotten all of these listener requested episodes, which is great. So please keep those coming. So if there’s anything you want us to cover, you can email me. My email address is in the show notes. You can leave a comment on YouTube or Spotify. Just let us know or voicemail. You can leave us a voicemail and just let us know if there’s anything you would like to hear.

Jayamanne: So today’s episode is on the top shares of Australia’s best-performing super funds.

LaMonica: Okay. And so what we’re going to do is we are going to take a look at some data from SuperRatings. So they release the best and worst super funds each year by performance. And it’s organized by category. So by asset classes and premixed categories.

Jayamanne: Because of course, it wouldn’t be fair to compare the performance of a cash fund to a high growth fund that has 91% to 100% in growth assets. So they’re roughly grouped to compete with peers.

LaMonica: And we’re going to take a look at the category that we think will be most interesting to listeners. And that is the high growth category. And we’re looking at performance over a three-year period as of the 31st of March.

Jayamanne: So the top funds are Perpetual WealthFocus, Perpetual Global Allocation Alpha. And that’s in the top spot. It returned 12.37% per annum over the last three years.

LaMonica: And then we have Spaceship GrowthX. It returned 10.91% over the last three years.

Jayamanne: And we have Vision SS Just Shares. And they returned 9.42% over the last three years.

LaMonica: I mean, I will say all three names are ridiculous. Like, I don’t know who named these things, but...

Jayamanne: What would you name your super fund?

LaMonica: I haven’t thought about it.

Jayamanne: Okay.

LaMonica: I was recently called a keyboard warrior. So maybe that can be the name of my super fund.

Jayamanne: All right. You think that’s less ridiculous?

LaMonica: No, I think it’s ridiculous. Somebody called me that and accused me of taking their home. But there we go.

Jayamanne: Let’s move on.

LaMonica: Okay. An important disclaimer other than that the names are ridiculous is that these are investment options that are heavily tilted towards growth assets, as we mentioned. So when we look at the portfolios, they don’t represent a diversified portfolio with a diverse range of assets. They really just focus on equities.

Jayamanne: So in reality, with options one and three, Perpetual and Vision, they’re on a platform where you’re able to pick and choose the investment options and your allocation to those investment options. So that’s how you’d use those investments in a practical sense.

LaMonica: But we do think they work for our episode today, because really we want to know what these super funds are picking for their equity investments and the shares that they’re making the biggest bet on.

Jayamanne: So without further ado, let’s turn to the top of the list, which is Perpetual WealthFocus, Perpetual Global Allocation Alpha. And the top holding in the fund is Sanofi with the ticker symbol S-A-N is listed on the Paris Stock Exchange.

LaMonica: And it’s a pharmaceutical company and they’re a wide lineup of branded drugs and vaccines, as well as a robust pipeline that give them really strong cash flows, which of course we want as investors. And we give them a wide economic moat. And just as a reminder, wide economic moat means that we believe they have a sustainable competitive advantage that will last for at least the next 20 years. And that means that our analysts believe that the growth of the existing products that they have and new product launches should help offset the patent losses that of course every drug company goes through.

Jayamanne: And their existing product line boasts several top tier drugs, including immunology drug Dupixent. So Dupixent looks well positioned to reach peak sales of over EUR20 billion. And what they’re focusing on initially is moderate to severe atopic dermatitis.

LaMonica: And we also think that the drug is able to perform in areas such as severe asthma and there’s strong clinical data in chronic obstructive pulmonary disease, COPD. So the drug will be able to serve a variety of patients, which of course is good for those sales.

Jayamanne: Now let’s go back to that wide moat. What’s really underpinning it are their patents, economies of scale and a powerful distribution network. Sanofi’s patent protected drugs carry strong pricing power, which enables the firm to generate returns on invested capital in excess of its cost of capital. In other words, it’s profitable.

LaMonica: Yeah, and what’s really important obviously to keep this pipeline going is research and development. So any pharmaceutical company has to constantly invest in developing drugs for the future. So the patents that they have, of course, do give the company time to develop the next generation of drugs before they have to compete with generic drug offerings that are often cheaper.

Jayamanne: And even though the company does hold a diversified product portfolio, it does have some product concentration. So we can see that with Dupixent their largest drug, which represents 30% of all sales. But we think that new products will mitigate the eventual generic competition, which will be likely after 2030. So they do have a little bit of time.

LaMonica: Alright, so let’s talk about the business as a business, Shani. So they have had a history of acquisitions, and they do have a lot of cash flow from operations, which means they could take advantage of further growth opportunities through external collaborations. And our analysts do expect them to continue to do that and focus on rare disease drugs because they’ve had success in the past in that area.

Jayamanne: And overall, we actually think Sanofi is considered undervalued at the moment. Our analysts assign it a fair value estimate of EUR117. And at the time, recording the share is trading around EUR92.

LaMonica: Let’s move on to Spaceship GrowthX. And a little disclaimer before we move on to the share that we’re going to highlight. So the latest holding disclosure report shows that Spaceship GrowthX invested in a number of underlying investments, including the Macquarie True Index Australian Shares Fund, which has a 25% weighting. The latest holding disclosure we could find was from 2022. So we don’t imagine that there has been a change in the target for the underlying holdings for the fund. So we based our analysis on the top holdings of the Macquarie True Index Australian Shares Fund. They’ve got their holdings up to date from the 31st of March 2025. That was a long disclaimer.

Jayamanne: Yes. So with that out of the way, let’s get to their top holding and one that’s a little bit closer to home and that we’re all familiar with and that’s CBA or Commonwealth Bank of Australia.

LaMonica: All right. And CBA is the largest of Australia’s four highly profitable, wide moat rated banks. It offers a full suite of banking services in Australia and New Zealand. In the long run, the bank has consistently increased shareholder wealth in favorable economic times. The loan books, large weighting to home loans and the high proportion of customer deposits reduces risk on bad debts and sudden changes to funding costs.

Jayamanne: And like Sanofi, CBA has a wide moat, meaning it can maintain a sustainable competitive advantage over competitors for at least the next 20 years.

LaMonica: And we can talk generally about banks here. So bank moats are typically derived from two sources, cost advantages and switching costs. So cost advantage is an important source of the bank’s wide economic moat supported by that low cost deposit base that we talked about, operating efficiency and conservative underwriting relative to peers. So basically what this means is CBA is able to source funds at a lower cost. Their key funding cost advantage is the roughly 70% of funding, which is sourced from customer deposits.

Jayamanne: And the rates that they offer on fixed term deposits are often higher than wholesale funding markets. But where they make their money is when customers are holding funds in transaction or saving account, accounts that earn typically little to no interest. And this is really supported by switching costs. So we’ve spoken about this a few times before on the podcast, but it is a pain to switch banks.

LaMonica: It is. So basically what customers are paying is a loyalty tax. It’s a tax for staying loyal to a bank. Maybe it’s because they’re lazy and they don’t want to look at other options. Maybe it’s because of the user experience. They like the experience they get with the bank or the support that they’re getting. Maybe it’s because they have multiple products bundled together that make them more sticky for whatever reason customers are staying in these accounts. And it means that CBA has access to cheap loans. And this helps them with maintaining their competitive advantage.

Jayamanne: And one other point to note is that there is conservative underwriting relative to peers. Basically, this results in lower loan losses on average through the cycle. Given the commoditized nature of the industry and the competition for both loans and deposits, low costs is key to achieving excess returns.

LaMonica: We need to talk about valuation, of course, which there’s been a lot about in the media about CBA. So on a forward price earnings ratio, it’s above 25, which is really high for a bank. There’s a 3% dividend yield, a price to book value above 3.5, and our analyst Nathan believes CBA shares are materially overvalued. And it’s certainly a strong business. He thinks a premium to peers is warranted due to that low-cost funding and superior operating efficiency, but he thinks this gap is really extreme.

Jayamanne: So CBA is currently considered 73% overvalued compared to its fair value estimate assigned by Nathan, which is $98. So that makes it a one-star stock.

LaMonica: All right. We’re going to move on to our last one, Shani. So as a reminder, that’s Vision Super. And their biggest holding is another obscure company in Australia, BHP.

Jayamanne: And everyone who is listening to this podcast would be familiar with BHP. BHP is the world’s largest miner by market cap. Their main operations been iron ore, copper, and metallurgical coal.

LaMonica: And they have minor contributions from thermal coal and nickel, and the company is developing a potash project in Canada.

Jayamanne: So let’s speak a little bit about the company’s recent history. BHP merged its oil and gas assets with Woodside Energy in June of 2022, vesting the Woodside shares it received to BHP shareholders and exiting the sector. And BHP purchased copper miner OZ Minerals in fiscal 2023.

LaMonica: So commodity demand is tied to global economic growth, but particularly China. And BHP has benefited greatly from the China boom over the past couple of decades. China’s BHP’s largest customer accounting for roughly 60% of sales in fiscal 2024. And when we look to the future, we think demand for a lot of the commodities is likely to soften as this China boom ends. Our analysts think that this will particularly impact iron ore, which has disproportionately benefited from the boom in infrastructure and real estate investment in China. So overall, our analysts think the outlook is for earnings to materially decline.

Jayamanne: And it’s generally low cost, high quality assets meaning that BHP is likely to be one of the few miners that remains profitable through the commodity cycle. And we won’t go into the commodity cycle here and how it impacts companies and shares, but we’ve done a deep dive on this before.

LaMonica: And this is before we were a lot more direct with the names of our podcast. We’re trying to be funny, Shani.

Jayamanne: We were.

LaMonica: Which may or may not have worked. But if you would like to find it, it’s called Do We Want Santa to Give Us Coal for Christmas? It speaks about the commodity cycle, as we mentioned, but it also explores the concept of price takers and looks at BHP’s competitive environment.

Jayamanne: All right. So back to BHP. Much of the company’s operations are located close to key Asian markets, particularly the low cost iron ore business, providing a modest freight cost advantage relative to some producers as such as those in Africa or South America.

LaMonica: And our analysts think that BHP correctly values a strong balance sheet to provide some stability through these inevitable cycles that they’ll go through. And the company does derive some modest benefit from commodity and geographic diversification.

Jayamanne: And the majority of its revenue does come from assets in the relative safe haven of Australia. The development of Jansen in Canada is BHP’s major expansion project with the company also pursuing modest expansion of its Western Australian iron ore operations above 290 million metric tons per year.

LaMonica: And the good times during the height of the China boom saw significant capital expenditure from BHP, notably on iron ore and onshore US shale oil and gas. So overinvestment during this boom diluted returns to the point where our analysts struggle to justify a moat. So as a commodity producer, BHP lacks pricing power. It is a price taker. And again, we explore those concepts in our commodity episode.

Jayamanne: But here’s the good stuff. It’s generally low cost high quality assets means BHP is likely to be one of the few miners that does remain profitable through the quantity cycle, as we mentioned.

LaMonica: And right now we consider BHP fairly valued. So it’s trading close to the $40 fair value estimate. At the time we’re recording this podcast.

Jayamanne: So now that we’ve gotten through the interesting stuff, we do want to give some context. We’ve obviously used this data to look at the shares that they’ve taken big bets on. But it is important to note that we don’t believe that investors should be making decisions about what super funds that they should be in it based on performance.

LaMonica: And when these lists are released, the funds tend to receive investor inflows as investors, of course, want to receive the stellar returns outlined on the list.

Jayamanne: And we’ve obviously heard the phrase past performance isn’t an indicator of future performance ad nauseam, and it is the truth. Every year when the list of top performing super funds are released, the top performers see that huge inflow as we mentioned. And we do encourage you to look at the top performer across different time frames. It’ll change in almost every instance. And this is why performance in the traditional sense doesn’t have a weighting in Morningstar’s fund research methodology. So that means that they don’t rank funds based on their past performance.

LaMonica: And what is important is relative performance compared to the fund’s benchmark. So super funds will have an investment objective that they’re looking to reach. And this is where you can see how they’ve stacked up against that objective. We can use AustralianSuper as an example. So looking at the high growth option, the investment objective is to beat CPI by 4.5% over the medium to longer term. It recommends a minimum investment timeframe of 10 years.

Jayamanne: So when we look at performance, it has achieved that. It achieved 7.9% per annum over a five year period and a 9.04% per annum over a 10 year period. And that’s at 30th June 2024. But that’s the latest data that AustralianSuper has on its website at 20th May 2025.

LaMonica: So in that case, the relative performance against the benchmark shows that AustralianSuper has achieved its objective.

Jayamanne: Exactly. And in 2020, the Morrison government brought in legislation that required super funds to meet an annual objective performance test. And the purpose of this was to root out underperforming super funds. And those that underperformed were not able to accept new members and had to inform current members of that underperformance.

LaMonica: So what we’re seeing is that investors who might be disengaged with their super fund, they will receive this letter in the mail. And it says that your super fund has underperformed. So those letters are sent in late September to early October.

Jayamanne: And one thing to remember with superannuation, especially for aggressive funds, the fund managers are basing their allocations on long time horizons. And this legislation can punish super funds for underperforming over the short term and discourage this long term outlook.

LaMonica: And the concern is that they’ll become closet indexers. And that just refers closet indexing refers from super fund managers or any manager who fear diverging too far from the index because they don’t want the consequences of that. So we could see a professional manager running a super fund that looks a lot like an index and behaves a lot like an index. And they could avoid assets like private equity, job creating infrastructure projects, early stage technology companies, venture capital, and all manner of illiquid assets that perform differently.

Jayamanne: So what should investors do about this? There’s nothing that mandates that you have to remove yourself from investments if they underperform. There’s nothing that says that a one or even three year return is the final determinant of your retirement outcomes. Switching funds like this can be to your detriment and we call this behavior gap.

LaMonica: So we talk about this every episode, Shani.

Jayamanne: We do.

LaMonica: The mind the gap study.

Jayamanne: It’s a good study.

LaMonica: I know. We should, I don’t know what, receive some sort of royalty.

Jayamanne: Work for Morningstar.We get a salary for it.

LaMonica: I guess we do. There we go. So the mind the gap study is a reminder. It’s the return achieved by a fund that looks at the return achieved by the fund and then looks at the return received by an investor and they are different. So the fund return is based on the underlying assets in the fund. The investor return is based on the inflows and outflows of actual investors deciding when they want to buy into a fund or sell out of a fund. And those inflows and outflows have no direct impact on the performance of the fund. So it’s the timing of the investments, which is why you have that gap.

Jayamanne: And the latest edition of the report shows that investors significantly underperform their investments. Investors in Australia missed out on 7% of their total returns and we’re looking at 10 year returns in this instance.

LaMonica: And that’s just one of many studies that show this impact. So just remember, because it can be tempting to switch and chase returns. Just remember that timing decisions hurt investors. So you could be making a poor one as well. All right, we did it.

Jayamanne: We did it.

LaMonica: We got through a French pharmaceutical company.

Jayamanne: Yeah, I’m sure I said that name wrong. You avoided saying it throughout the whole episode.

LaMonica: No, I cut out lots of different drugs that I did not want to say. But anyway, we made it. We’re at the end. Thank you guys for listening. We really appreciate it. If you have any episode suggestions, just send them through the email or put them in the comments.

(Disclaimer: Any advice in this podcast is general advice or regulated financial advice under New Zealand law prepared by Morningstar Australasia Proprietary Limited and/or Morningstar Research Limited without reference to your financial objectives, situations or needs. You should consider the advice in light of these matters and any relevant product disclosure statement before making any decision to invest. To obtain advice for your own situation, contact a financial advisor.)