Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 82

Building more relevant Australian share portfolios

The Australian equity portfolio management industry is highly competitive. However, the portfolios it delivers can be under-diversified by security and sector, and key product offerings appear undifferentiated to all but the keenest observers. With the exception of some funds focussed on companies outside the largest 100 companies, most managers’ portfolios mirror the capitalisation-weighted S&P/ASX 200 index.

Is this a problem? After all, over the last two decades the returns from professionally-managed Australian share portfolios have been attractive. To the extent that there is a problem, it is fair to say a good deal of responsibility rests with clients and intermediaries rather than investment managers. In this industry products and services respond rapidly to well-articulated and consistent demand but the incentives clients set for managers is a key impediment to innovation.

Clients and their advisers define equity mandates in terms of the S&P/ASX 200 benchmark portfolio, and assess performance relative to the benchmark over short periods. Sometimes management contracts incorporate performance fees which specifically reference these benchmark returns. It is therefore entirely sensible for a manager to reflect their investment insights through a portfolio of securities whose weights are anchored to the security and sector weights of the benchmark.

The resulting portfolios become under-diversified because the benchmark itself is under-diversified. While the index incorporates around 200 securities, its eight largest names represent over half the benchmark capitalisation while two of the ten industry sectors – Financials and Materials - represent over 60% of its capitalisation. A manager who is not attracted to these particular segments of the market, but operates under a benchmark-focussed mandate, can feel constrained in terms of how aggressively they can represent these views in their portfolio. Where the manager would prefer to express a favourable view of these market segments, there is a risk that the portfolio becomes dangerously concentrated.

How might clients and intermediaries reframe mandates to better leverage managers’ investment insights? The starting point is to understand how an investor defines investment success. Is the benchmark index really so important to achieving the client’s goals? Here we consider ways to deliver superior benchmark-relative portfolios as well as identifying some increasingly important alternative goals.

Benchmark-relative approaches and expensive indexing

Super funds and large wealth managers typically conform to the institutional approach of delivering benchmark-focussed Australian equity portfolios to their members and clients. They believe, perhaps implicitly, that their own performance will be assessed relative to the benchmark index or relative to their benchmark-focussed peer group.

These portfolios are often created by allocating broad market mandates to several equity managers, each selected for their capacity to deliver returns in excess of the S&P/ASX 200 index. Given the concentrated nature of the benchmark this approach can be an inefficient and expensive way to capture and deliver the managers’ collective insight.

The source of the inefficiency is most apparent in the super funds’ overall exposure to the larger companies in the market. Rather than directly reflecting a manager’s optimism about a stock’s return prospects, the aggregate exposure to a large-cap company ends up reflecting the managers’ outlook for these stocks plus their different attitudes to benchmark-relative risk management.

In practice, super fund managers can end up trading between themselves in these larger names which is inefficient from a transaction cost, tax and management fee perspective. This is most evident in cases where a position taken by one manager largely offsets the position of another. This inefficiency leads to the somewhat unfair description of multi-manager portfolios as ‘expensive indexing’.

One simple approach to address this is to specify mandates that require managers to operate in market segments where their insights are likely to be most effective. For instance, the 20 largest companies are extensively researched by analysts yet coverage of mid-cap and small-cap names is more limited. A skilful manager who takes a position in these less researched stocks could earn a higher reward for risk.

A super fund that mandates most of its Australian equity managers to replicate the benchmark for the market’s top 20 stocks, while focussing on stock selection for the remainder of the universe, obtains several benefits:

  • Transaction costs, tax leakage and management costs will be reduced in this portfolio design.
  • While the level of return above benchmark may be modestly reduced, relative to the approach based on broad market benchmarks, the profile of the excess returns delivered should be far more stable.
  • Super funds that are genuinely concerned about benchmark concentration in Australian shares have the opportunity to adjust their overall share portfolio without disrupting their underlying managers preferred positioning.

Some SMSFs might be more attracted to managed funds where exposure to larger Australian companies has been excluded. These SMSFs might believe they are as well-placed as the professionals to build a portfolio of large cap stocks while acknowledging they lack the capability to research smaller companies.

Goal-based strategies

There are a growing number of investors who care more about the achievement of their own specific goals rather than sweating on a manager’s short-term performance relative to a benchmark. For these investors the benchmark index merely presents an opportune set of securities rather than a neutral portfolio or a performance hurdle.

Their focus is on the design and management of a portfolio of securities with suitable fundamental and technical characteristics to support their desired outcome. When compared to benchmark-focussed approaches, these tailored portfolios typically have higher exposures to mid- and small-cap stocks and less to the large-caps.

Three differentiated investment outcomes appear to resonate with clients:

  1. the delivery of a sustainable income stream (Australian equity income strategies)
  2. resilient growth in wealth (resilient equity strategies)
  3. high, long-term compound growth in wealth (long-term, long only strategies).

The critical distinction between these goal-based strategies and the benchmark-focussed approach is that managers are responsible for the total risk and return characteristics of their portfolios rather than just excess return and tracking error to benchmark.


The vast majority of managed funds and mandates in Australian equities deliver broad market portfolios. The future is likely to be different with clients becoming more involved in specifying the segments in which their managers operate and the outcomes they require.


Jeff Rogers is Chief Investment Officer at ipac Securities, AMP Capital.


Bounce back delivers super second-half for IPOs

IPO a-go-go: the who, why, when and how much of IPO investing

How to define spending goals in retirement


Most viewed in recent weeks

Three steps to planning your spending in retirement

What happens when a superannuation expert sets up his own retirement portfolio using decades of knowledge? He finds he can afford much more investment risk in his portfolio than conventional thinking suggests.

Five stock recoveries not hanging on COVID predictions

The focus on predicting the recovery from the pandemic is the wrong emphasis. Better to identify great companies benefitting from market changes over a three- to five-year horizon with or without COVID.

Peak to peak, which LIC managers performed during COVID?

A comprehensive review of dozens of LICs shows how they performed in the crucial 'peak to peak' of COVID. This 14 months tested the mettle and strategies of a sector often under fire, with many strong results.

Finding sustainable dividend stocks on the ASX

There is a small universe of companies on the ASX which are reliable dividend payers over five years, are fairly valued and are classified as ‘negligible’ or ‘low’ on both ESG risk and carbon risk.

Blink and you missed a seismic shift in these stocks

Blink and it happened. If announcements in this sector were made by a producer of iron ore, gas, copper or some new tech, the news would have been splashed across the front pages. Have we witnessed a major change?

How inflation impacts different types of investments

A comprehensive study of the impact of inflation on returns from different assets over the past 120 years. The high returns in recent years are due to low inflation and falling rates but this ‘sweet spot’ is ending.

Latest Updates


Platinum’s four guiding investment principles

Buying mispriced stocks is often uncomfortable when companies are outside the spotlight and markets are driven by emotions. And it's inescapable that the price paid ultimately determines the end result.


Andrew Lockhart on corporate loans as an income alternative

Loans to corporates were the traditional domain of banks, but as investors look for income alternatives to term deposits, funds have combined hundreds of loans into a single structure to create a diversified investment.


10 things I learned in my faux-retirement

Pre-retirees should ‘trial run’ their retirements. All those things you want to do - play golf, time with the family, a hobby, write a book - might not be so appealing in reality, but you might discover other benefits.


Achieving a sufficient retirement income portfolio

Retirees require a reliable income stream to replace the wages they received when they were working and should focus on the dollar income generated over time rather than the headline yield percentage.

'Wealth of Experience' podcast and ASA webinar on ETFs v LICs

Peter reveals some top stock picks with an emphasis on long-term assets like Sydney Airport, Graham discusses spending in retirement and valuing assets, the key to Amazon, guest Andrew Lockhart and plenty more.


Lucy Turnbull’s three lessons on leadership and successful careers

From promoting women to boost culture to taking opportunities as they arise, Lucy Turnbull AO says markets should not drive decision-making and leaders must live and breathe the company's mission and values.


Are concerns about inflation inflated?

While REITs and some value stocks are considered 'inflation-sensitive' assets, the data provide little support that they are good inflation hedges, and energy stocks and commodities are too volatile. So what works?



© 2021 Morningstar, Inc. All rights reserved.

The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.