By Paul Rickard

Despite June being the worst month for the ASX this financial year, with the benchmark S&P/ASX 200 falling 5.5%, many super funds still look set to deliver double digit returns for the year just completed. And because of their exposure to stocks paying fully franked dividends, particularly the major banks and Telstra, some SMSFs will deliver even higher returns into the mid teens.

According to SuperRatings, for the 11 months to 31 May, the median ‘balanced’ super fund (those with 60% to 76% invested in growth assets such as shares and property) returned 11.9%. The median return for a pension fund in this category was higher at 12.7%, as it doesn’t pay tax on the investment earnings.

With the ASX losing 5.3% in June when dividends are taken into account, the US market losing 2.0% and the rest of the world around 4.0%, the median balanced super fund return should come in at around 9.0%, and pension funds in this category at 10.0%. High growth funds that have high weightings in overseas shares should do even better. More conservative funds (growth assets of between 21% to 40%) are set to return around 6.5%, while their pension fund equivalent will top 7.0%.

Yield sectors star in 2014/15

Over the course of the financial year, the so-called “yield” sectors starred. The largest sector on the ASX by market capitalization, financials, returned 8.5% when dividends are included. Property trusts (or A-REITs) added 20.3%, Utilities 14.2% and Telecommunications (which is dominated by Telstra) soared 25.8%.

Although the second half wasn’t as strong as the first half, each of the “yield” sectors has outperformed the S&P/ASX 200 accumulation index. For example, financials have added 3.8% since the start of 2015 compared to 3.1% for the index. And despite concerns about banks having to raise more capital, financial stocks have bounced back from their mid-June lows as the RBA got its story back on track about future interest rate movements. As a result, financials was one of the better performing sectors in June, losing only 2.9%.

On the back of the performance of the “yield” sectors, many SMSFs should register low to mid teen returns in 2014/15, as they are typically overweight the major banks and Telstra due to the tax effective nature of their high, fully franked dividends.Source: Standard & Poor’s. Total return results to end June 2015.

Other sectors to star included Industrials (on the back of a lower Australian dollar), and the health care sector. Although this sector has slowed over the last couple of months as investors become concerned that it was getting too expensive, its return for the financial year was still a very handsome 29.2%.

In the red were energy and materials, the former impacted by falling oil prices, and the latter by prices for mineral commodities, particularly iron ore and copper. Consumer staples, which comprises companies such as Woolworths, Wesfarmers and Metcash, lost 10.4% over the year as the supermarket “wars” gathered pace – at least in relation to the fear that foreign entrants such as Aldi, Costco and potentially Lidl would place pressure on margins.  

Next financial year?

Once we get through the Greek crisis, the market should start to head back towards 6,000. If it follows the pattern of the last few years, the “grind” will continue – any sudden upward move will be met by months of “work” as it tests and retests the higher level.

And my confidence for this prediction? Interest rates globally are near record lows and central banks are still switched onto quantitative easing. This provides a massive boost to asset prices (higher), and although the US Fed looks set to make its first rate move up in September, it is doing it for the right reasons (a stronger US economy). The Fed is going to be very careful about prematurely snuffing out growth or frightening the market.

In Australia, an improving employment picture and increasing consumer and business confidence should help the economy. Weakness in the Australian dollar (if it ever comes) will help our trade exposed and import competing industries.

What does this mean for sector exposure on the ASX? Firstly, stick with the yield sectors. While banks will improve their capital ratios (either from raising capital, selling non-core assets or not neutralizing dividend re-investment plans) and this is ultimately dilutive to earnings, yields of over 5.5% fully franked are too tempting.  We may not get back to the levels of March (CBA peaked at $96.69), however that is still 12.4% higher than where we are today.

Next, be wary of the materials sector. I can’t see a case yet for higher base commodity prices (particularly in the expectation that the US dollar will strengthen), so stay underweight on the BHPs and RIOs. The prospective yields may look tempting – however sustainability is the question.

Oil prices and energy stocks? How clear is your crystal ball? Possibly great long term buys, but you might have to wear considerable short-term pain.

It is hard to think that the supermarket wars are over yet, so stocks from consumer staples will be tough going. While there may not be a lot of price downside left and they might not be too far off a buy, they will no doubt lag in any broad based market rally.  Stay underweight.

Healthcare still has the long term demographic factors of an ageing population and increasing per capita spend, so notwithstanding that some of the stocks are pretty expensive, look to be overweight. Industrials and consumer discretionary are the other sectors to play from the long side, as particular stocks should benefit from a lower AUD and increasing consumer confidence.

That’s how I am playing 2015/16.