Take for example the Australian share market representation within the MSCI Developed World Index. At the peak of the dot com bubble, Australian assets went both unloved and under-owned. The Australian dollar was near half current levels while Australian share representation was a miserly 1.2 per cent of the MSCI World. Today this representation has more than doubled. Australian assets are now both well-loved and well-covered by most global investors.

But as strong as the performance has been of Australian shares in general, these robust results were dwarfed by the even greater returns generated by the Australian mining and resource sector. At the peak of the dot com bubble of 2000, Australian resource shares represented around 15 per cent of the broad ASX 200. Today, resource shares represent near 35 per cent of the ASX 200. If it is correct to assume that resources are generally more cyclical, higher beta, and higher volatility assets, then their increase within the broader share market should increase the overall volatility of that asset class.

According to the Mercer asset allocation survey on Australian balanced funds for the month ended April 2008, the average asset weighted allocation towards Australian shares for balanced funds was 34.2 per cent. The minimum allocated to Australian equities was 25.3 per cent, whilst highest was 40.2 per cent. The second highest asset allocation was towards international shares, with the average balanced fund holding 25.8 per cent. In the latest available online APRA asset allocation survey of June 2007, Australian superannuation funds held a not too dissimilar allocation towards Australian shares at 31 per cent.

Regardless of the survey used, Australian shares are still the single largest exposure held by most diversified balanced funds.

Historical asset allocation analysis shows a not too dissimilar conclusion – Australian balanced funds have long held a bias towards Australian equities. While diversified funds’ objectives are defined by real return targets and by expected positive returns in years, asset allocation figures change little from year to year. Where there are shifts in asset allocations, much of the shift can be explained by market movements rather than active changes. Most funds prefer to set their strategic asset allocation and let them move with the market.

The extremely strong performance from Australian shares, coupled with the even stronger results from resource shares, has no doubt influenced the risk/reward metrics of balanced funds. As of month end May 2008, the GICS Resource sector weight in the ASX 200 index was 32.6 per cent, whilst BHP represented 13.0 per cent and Rio Tinto 3.5 per cent. Australian equities represents 2.8 per cent of the MSCI ACWI (combined World Developed and Emerging) index, compared to the larger markets of the US at 41.5 per cent, Continental Europe at 21.8 per cent, UK 9.2 per cent, Japan at 9.0 per cent, Asia ex Japan 10.1 per cent and China at 1.6 per cent.