The top shares of Australia’s best performing super funds
And our equity analysts’ outlook for the stocks.
Every year, Super ratings releases the best and worst superfunds. These superfunds are categorised into asset classes, and pre-mixed categories.
The high growth category includes funds with a 91-100% allocation to aggressive assets. It is important to keep in mind that many of these funds are focused on one asset class. For most investors, they would have an allocation to other asset classes. The latest results for the high growth category are below.
These are the top holdings for the top 3 superfunds on the list.
1. Perpetual WealthFocus – Perpetual Global Allocation Alpha
Merck & Co Inc (NYSE: MRK) ★★★
Fair Value: $120
Moat: Wide
Patents, economies of scale, and a powerful intellectual base buoy Merck's business and keep it well shielded from the competition. Our analysts believe that Merck has a wide moat, meaning that they have confidence that the company can keep competitors at bay, and will be able to maintain and grow earnings over at least the next 20 years. As the bedrock of Merck's wide moat, patent protection should continue to keep competitors at bay while the company strives to introduce the next generation of drugs. Further, the company's enormous cash flows support a powerful salesforce that not only sells currently marketed drugs, but also serves as a deterrent for developing drug companies seeking to launch competing products. As a result, Merck offers a powerful partnership opportunity for externally developed drugs. The cash flows also put the company in the rare position of supporting the approximately $800 million in R&D needed on average to bring each new drug to the market. While not as powerful as in the 1990s, Merck's research laboratories still hold a vast database of knowledge that should help the company to maintain its leadership positions in drug discovery and development.
On the pipeline front, after several years of only moderate research and development productivity, Merck's drug development strategy is yielding important new drugs.
Merck's combination of a wide lineup of high-margin drugs and a pipeline of new drugs should ensure strong returns on invested capital over the long term.
2 & 3 Rest - Shares option and Vision Super – Just Shares
BHP Ltd (ASX: BHP) ★★★
Fair value: $40.50
Moat: None
BHP is the world’s largest miner by market capitalisation. Main operations span iron ore, copper, and metallurgical coal. Minor contributions are from thermal coal and nickel, while the company is developing its Jansen potash project in Canada. BHP merged its oil and gas assets with Woodside Energy in June 2022, vesting the Woodside shares it received to BHP shareholders, and exiting the sector. It purchased copper miner Oz Minerals in fiscal 2023.
Commodity demand is tied to global economic growth, China’s in particular. BHP benefited greatly from the China boom over the past two decades. China is BHP's largest customer, accounting for roughly 60% of sales in fiscal 2023. With demand for many commodities likely to soften as the China boom ends, particularly iron ore which has disproportionately benefited from the boom in infrastructure and real estate investment, we think the outlook is for earnings to materially decline.
Its generally low-cost, high-quality assets mean BHP is likely to be one of the few miners that remains profitable through the commodity cycle. 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 such as those in Africa and South America.
BHP correctly values a strong balance sheet to provide some stability through the inevitable cycles and derives some modest benefit from commodity and geographic diversification. Much of its revenue comes from assets in the relative safe haven of Australia. The development of Jansen in Canada is BHP’s major expansion project now that the Spence Growth Option copper project is ramping up, with the company also pursuing modest expansion of its Western Australia Iron Ore operations above 290 million metric tons per year.
The good times during the height of the China boom saw significant capital expenditure, notably on iron ore and onshore U.S. shale gas and oil. Overinvestment in the boom diluted returns to the point where we struggle to justify a moat. As a commodity producer, BHP lacks pricing power and is a price taker.
We forecast fiscal 2024 earnings per share of USD 2.99 (around AUD 4.43) per share, which is 13% higher than last year, driven by higher iron ore and copper sales and prices. Our fiscal 2024 dividend forecast of USD 1.64 (about AUD 2.43) per share is about 4% lower than last year. We assume a 55% payout ratio, modestly higher than BHP’s target minimum payout ratio of 50%. Shares in BHP are trading around 6% above fair value.
Our Investing Compass episode on Commodities explores the concept of price takers, the commodity cycle, and BHP’s competitive environment.
Does the list matter?
When these lists are released, the funds tend to receive investor flows as investors want to receive the stellar returns outlined in the list.
We have heard the phrase ‘past performance is not a reliable indicator of future performance’ ad nauseum – it’s the truth. Every year, when the list of top performing superfunds are released, the top performers see huge inflow. I encourage you to look at the top performer across different time frames – it changes in almost every instance. This is why performance in the traditional sense doesn’t have a weighting in Morningstar’s fund research methodology – meaning – they don’t rank funds based on their past performance.
What is important is relative performance compared to the fund’s benchmark. Super funds will have an investment objective that they are looking to reach, and this is where you can see how they’ve stacked up against this. We can use Australian Super as an example. Looking at the high growth option, the investment objective is to beat CPI + 4.5% over the medium to longer term. It recommends a minimum investment timeframe of 12 years.
When we look at performance – it has achieved that. It has achieved 7.90% p.a. over a 5-year period, and 9.04% p.a. over a 10-year period (AustralianSuper website figures at 18 July 2024). Based on relative performance to its benchmark, AustralianSuper has achieved its objective.
Received a letter from your superfund?
In 2020, the Morrison government brought in legislation that required superfunds to meet an annual objective performance test. The purpose of this was to root out underperforming super funds. Those that underperformed were not able to accept new members and had to inform current members of the underperformance.
If your superfund underperformed, it’s likely that you recently received a letter as they are received by members in late September to early October.
One thing to remember with superannuation is that especially for aggressive funds, the fund managers are basing their allocations on long term horizons. This legislation can punish superfunds for underperforming over the short term and discourages this long-term outlook. There are concerns that it will encourage closet indexing. Closet indexing results from superfund managers who fear diverging too far from the index. We could see the professional managers running the superfund behaving a lot like the index, as they avoid assets like private equity, job-creating infrastructure projects, early-stage technology companies, venture capital and illiquid assets that perform differently.
What should investors do about this? There’s nothing that mandates that you must remove yourself from investments if they underperform. There is nothing that says that a one or even three-year return is the final determinant of your retirement outcome. Switching funds like this can be to the investors’ detriment – we call this impact the behaviour gap.
We conduct a study called ‘Mind the Gap’. We look at the return achieved by a fund and then we look at the return received by an investor – these are markedly different. The fund return is based on the underlying assets in the fund. The investor return is based on the inflows or outflows of actual investors deciding to buy into a fund or sell out of the fund. Those inflows and outflows have no direct impact on the performance of the fund, but the timing of your investments have a huge impact on the return that you get.
In 2013, we looked at 10-year returns and compared the average return of funds and the average returns of investors. We looked at global share funds in the survey and found that the average return over 10 years was 8.77%. Then, we looked at the average return that an investor got. It was 5.76%. The difference of almost 3% is a gap that occurs purely due to poor decisions made by investors.
This is one of many studies that show this impact. It’s important to remember because it can be tempting to switch and chase those returns.
All star ratings and fair values are as of 18 July 2024