Geared funds have their day with returns to 60%
The best superannuation return for the year to June was 63 per cent, by the Colonial First State FirstChoice geared fund. Over five years, the fund has posted a 0.1 per cent annual loss; but over a decade its annual return is 11.4 per cent.
According to super research firm Rainmaker, the top workplace and personal funds in 2013 were geared, with funds run by Colonial First State, Perpetual and AMP returning between 40 and 58 per cent.
By contrast, the worst investment choice for the year lost 14.4 per cent.
Alex Dunnin, Rainmaker executive director of research and compliance, said the bumper Colonial First State return was a reward for greater risk during a sharemarket rally, and demonstrated the benefit of choosing funds carefully.
"It was no fluke when you think about it because the sharemarket earned 25 per cent in Australia and around 35 per cent overseas - meaning geared funds leveraging into these markets could have earned twice these returns," he said.
"So the performance boost is the leverage. This explains why the top performing industry fund investment choice (REST Industry Super Overseas Shares) earned a comparatively slow 31 per cent - it doesn't use leverage."
There are dozens of geared funds in Australia, and 2013's results would be among their best. Geared options are dominated by "retail", or for-profit, funds and their rules stipulate that the fund itself can't borrow, but its investment vehicles can leverage themselves.
Mr Dunnin said while only a small number of people chose geared funds, the results "nonetheless show how much money superannuation investors can make if they are well informed, well advised and perhaps a bit lucky".
Median growth funds - the most common fund type, with 61 to 80 per cent invested in growth assets - returned 15.6 per cent in 2013, on the back of rocketing sharemarkets.
Rival super research firm Chant West said although retail master trusts bested industry funds last financial year, due to their higher allocation of listed shares and property, not-for-profit funds have outperformed over the long term.
And SuperRatings data shows that since July, the median-performing balanced option has returned a touch over 14 per cent, as sharemarkets continue their rise.
Frequently Asked Questions about this Article…
Geared funds are investment funds that use leverage to amplify returns. This means they borrow money to invest more than the fund's actual capital, potentially increasing both gains and losses. In 2013, geared Australian share funds outperformed many others due to a strong sharemarket rally.
The Colonial First State FirstChoice geared fund achieved a 63% return in 2013, largely due to leveraging during a sharemarket rally. This strategy allowed the fund to capitalize on the market's 25% gain in Australia and 35% overseas, resulting in significantly higher returns.
Geared funds can be a good choice for investors who are well-informed, well-advised, and willing to take on higher risk for potentially higher returns. However, they are not suitable for everyone, as the leverage involved can also amplify losses.
In 2013, median growth funds, which typically invest 61% to 80% in growth assets, returned 15.6%. This was significantly lower than the returns from geared funds, which benefited from leveraging during a strong sharemarket rally.
Retail funds, often for-profit, tend to have higher allocations in listed shares and property, which helped them outperform industry funds in 2013. However, not-for-profit funds have generally outperformed over the long term, according to research.
Leverage is a key factor in the performance of geared funds. By borrowing to invest more than the fund's actual capital, leverage can significantly boost returns during market rallies, as seen in 2013 when geared funds outperformed due to strong market gains.
The REST Industry Super Overseas Shares fund, which does not use leverage, earned a 31% return in 2013. This was considered comparatively slow compared to geared funds, which benefited from leveraging during the market rally.
Investors should consider their risk tolerance, investment goals, and the potential for both amplified gains and losses when choosing a geared fund. Being well-informed and well-advised is crucial, as geared funds involve higher risk due to leverage.
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