The role of equities in your superannuation portfolio

Capital protection plus capital growth are the twin goals many of us have for our super. Here's how an actively managed share fund can achieve both.

Equities have a lot to offer as an investment to grow retirement savings. Long term capital growth plus ongoing dividend income is a combination that makes shares a favourite among self-managed super funds (SMSFs) and retail investors.

Fortunately, there are several ways to gain exposure to shares.

Options include holding shares directly, investing via an exchange traded fund (ETF) or by purchasing units in an unlisted actively managed fund.

These choices are not mutually exclusive. Investors can opt for a combination of all three.

However, an actively managed fund can offer important advantages.

Active management calls for discipline - and plenty of research

Research shows that retail investors often mistime their entry into and out of share markets. Volatility can be a major factor here. Investors tend to buy when markets are booming (and share values are high), and bail out when markets dip and values fall.

ETFs can help investors avoid this issue. The downside is that most ETFs are index funds that simply mirror the market. This keeps fund fees low though it comes at the cost of returns that match the market at best, rather than outpace it.

An actively managed share fund brings an additional factor to the table - discipline. Investment guru Warren Buffett is credited with saying investors should be fearful when others are greedy, and be greedy when others are fearful.

In other words, the winning strategy is to buy when markets are down, and sell when prices are high.

It is the discipline to stick with this approach that allows experienced, active fund managers to deliver above-market returns.

The Chester High Conviction Fund is a great example of this outperformance.

As the table below shows, over the long term Australian shares have delivered average annual returns of about 8% though returns can be far more volatile over the short term.

The Chester High Conviction Fund has far-outpaced the market, achieving returns after fees of averaging around 14% annually.

When it comes to saving for retirement, this 6% outperformance can make a tremendous difference to an investor's wealth by the time they are ready to hang up their work boots.

Investing in transformative companies

How is the Chester High Conviction Fund able to deliver higher returns than, say, ETFs? The answer is simple.

Unlike most ETFs, which track a given benchmark, we do not hold stocks that make up the benchmark.

Let me explain.

The Aussie share market, and market indices, are dominated by a few big names.

Our biggest listed companies may be favourites among direct retail investors, but their sheer scale makes it hard for these corporates to generate returns above 7% annually.

As a fund manager for over 20 years, experience has taught me that to consistently achieve returns in the low teens, a portfolio needs to concentrate on smaller and medium-sized listed companies - what we call the small- and mid-caps.

These are the companies with the agility to transform as our economy transforms. It calls for a long term focus, but this matches the investment horizon for superannuation savings.

The upshot is that the Chester High Conviction Fund looks for the high performers among the small- and mid-caps within the S&P/ASX 300 Accumulation Index.

Finding those unloved, underappreciated or undiscovered stocks calls for plenty of research: It's not called a 'high conviction' fund for nothing.

But the fund isn't just about high returns.

Clever strategies to grow and protect capital

The Chester High Conviction Fund has a mandate to grow and protect investors' capital.

These are exactly the twin goals that so many of us look for in our superannuation portfolio. And we achieve them through a clever strategy.

Around 6-8% of the fund's portfolio is invested in cash and gold.

Holding cash allows the fund to buy attractively-priced stocks when they become available. That's the growth component.

The appeal of gold is that it has very low correlation to other asset classes. Price movements are relatively independent. In this way, gold can reduce overall volatility and provide the element of capital protection.

A fund that lives up to its promise

The Chester High Conviction Fund team has worked together for over a decade. Our combined expertise really shows up in the fund returns.

For investors who are looking to grow generational wealth while preserving capital, the fund lives up to its promise. It can make a valuable difference to the value of your nest egg when you're ready to exit the workforce.