Are we in Australia headed for similar lessons? Given Australia has just experienced one of the best real return periods since 1936, has this impacted risk/return parameters of the average diversified balanced fund? After all, asset allocation and balanced fund decisions are generally made off asset class assumptions, not off manager configuration.

Let’s digress for a moment by examining the recent return pattern within Australian equities. Courtesy of our broking friends at JPMorgan, we’ve compiled the rolling one-year nominal returns on each of the 200 names within the S&P/ASX 200 index, and then categorized each into one of 10 GICS sectors. Starting from month-end June 1996 through to May 2008, we ranked and sorted each share from best to worst performance. We then grouped into two broad categories: resources and everything else. Not too surprisingly, the current top performing 5 per cent of companies (10 names) have all come from this resource universe. In contrast, back at the peak of the new economy bubble, not one resource name was within this prestigious list.

What is interesting is that neither BHP nor Rio, the poster children of the resources run, made this list of top performing companies. During the bottom of the old economy cycle of 2000, there were only 26 resource names in the ASX 200 Index. As of June 19, 2008, there are now 50 resource companies within the ASX 200 index. The vast majority are recent entries into the large cap arena following three to five year returns of 1,000 to 3,000 per cent. Fortescue Metals Group (FMG), for one such example, now represents 1.2 per cent of the ASX 200 index. As of June 18, 2008, and at a share price of $10.92, FMG’s market cap now makes it Australia’s fifteenth largest company. Three years ago, FMG had a share price of $0.29 and $0.018 five years ago, or returns of 3,665 per cent and 60,566 per cent over three and five years respectively. FMG today has a larger representation within Australian share benchmarks than AMP, Suncorp-Metway, and Macquarie Group.

Before some of you say, “Rob, I know. But this time, it really is different. This Black Swan lays eggs made from copper, zinc, iron, and gold”. I get it. This time around, Australia has been the beneficiary of the China miracle. Our proximity, trade position, and abundance in the raw materials used to fuel the Asian economies have all contributed handsomely to the aforementioned results. We’re the lucky country. But the relative enormity of the resources boom, coupled with its duration, has altered the risk/reward parameters within the whole Australian equity market and even more broadly, the Australian equity market’s position from the global capital market’s standpoint.