Headlines about super funds cutting Australian shares have prompted many clients to ask whether their own portfolios should follow. We have been looking at exactly that question during an SAA review, and our answer is a qualified yes. We are looking at modestly reducing the strategic weight to Australian shares, but moving cautiously. Australian shares still have a strong role as a diversifier, and that role is becoming more valuable, not less, as correlations rise across and within other asset classes. If we invested purely on a passive basis we might move more aggressively; because we can choose which parts of the Australian market to own, the case for a large cut is weaker. Here is the reasoning.

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Why do I have so much in Australian shares?

Australia is less than 2% of the world's share market, yet Australian shares are typically a quarter or more of a diversified portfolio. That looks lopsided, but there are sound reasons for it.

The first is franking. Australia is one of very few countries where dividends come with a tax credit attached. For a retiree paying little or no tax, franking adds roughly 1% a year to the return on the local market, and closer to 1.3% on the banks. No overseas market offers that.

The second is behaviour. Because franking rewards paying dividends, Australian companies hand cash back to shareholders and go back to them when they need to raise capital. That discipline makes the Australian market behave differently from markets where companies keep and reinvest most of their profits. Admittedly, giving cash back to shareholders is very much out of fashion at the moment with profit levels and growth so high but in rockier times investor preference for a bird in the hand might make a comeback. 

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Why are super funds reducing their allocation?

The headlines are true but overstated. Several large funds have trimmed Australian shares since 2025, mostly by one or two percentage points and mostly in their high-growth and indexed options. Several default options have not moved at all. Over 15 years, Australian shares have stayed at about a quarter of super fund assets; the growth in global shares was funded from bonds and cash.

The reasons funds give are fair ones. Some have simply outgrown a market where a handful of banks and miners dominate; one bank alone is about 12% of the index. Earnings growth has been stronger offshore, particularly in technology. And last financial year global shares beat Australian shares by a wide margin, which always prompts a rethink.

Our own models tell a similar story. On a ten-year view, the Australian market and global markets offer much the same return once franking is counted. The offshore case rests on diversification and growth, not on a higher expected return. Hence a modest reduction of around one percentage point, reviewed as we go, rather than a wholesale shift.

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Why look under the hood of the Australian market?

Because "the Australian market" is really three markets. The banks are sound businesses trading at unusually high prices. If their valuations drift back to normal over the next decade, they will deliver the lowest returns of any part of the market, even with franking.

Resources are the opposite: fairly priced but unpredictable. Earnings have fallen sharply for three years as commodity prices came off their peak; they may recover strongly or may not. That is a reason to hold them in moderation, not to avoid them. Then there is everything else: healthcare, insurers, industrials, infrastructure and consumer companies. Many are trading below their own long-run valuations after a difficult few years, and their expected returns stack up well against global shares. Add franking and they look better still.

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So the answer is not simply to own less Australia. It is to own a different Australia, with less riding on the big banks, a measured weight in resources, and more of the rest, where forward looking returns we think are actually quite comparable to the long term prospects for the tech heavy world index but likely to march to a different tune. Over the next round of investment committees we will be sharing some of the maths and fundamentals that substantiate these points and making some recommendations for revised Strategic Asset Allocation including these somewhat nuanced points.