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How MLC is tackling the problem of our concentrated share market

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Australia’s share market is one of the most concentrated in the world. The S&P/ASX 200, which covers the biggest 200 companies in the market, is dominated by two sectors, Financials and Materials (including mining companies), which together make up more than half the market.1The banks together account for 24% of the S&P/ASX 2002, making our market very vulnerable to events that could negatively affect the banking sector.

So how do you gain access the potential returns of our share market − with less risk?

At MLC, we’ve met this challenge by developing the unique Defensive Australian Shares Strategy. In this strategy, we invest in a large number of high quality Australian companies across many industries. This extensive diversification reduces risk, compared with the overall market, because risk is spread much more widely and lower quality companies are excluded from the strategy.

We’ve been managing this strategy since November 2015 and it has achieved returns above the Australian share market over that time, with much less risk.3

We developed the strategy for our MLC Inflation Plus portfolios. These portfolios target above-inflation returns by carefully managing risk, especially the potential loss of investors’ capital when markets are volatile. The strategy aligns with the goals of achieving returns while controlling risk and means we can hold a larger allocation of Australian shares than we’d otherwise be comfortable with.

Not the usual portfolio construction process

Most Australian share managers measure their performance against a market benchmark like the S&P/ASX 200.  They aim to make returns by picking the ‘winners’ that will deliver the highest return. However, these managers are often forced to include substantial allocations to the benchmark’s dominant sectors − whatever their view of the risk – to avoid a level of portfolio risk that’s too different to the benchmark.

In the Defensive Australian Shares Strategy, our approach is completely different. While our starting point is the companies in the S&P/ASX 200, we ignore benchmark weightings and focus on controlling risk by identifying and eliminating riskier companies (such as those with weak financials) and limiting the amount we invest in individual companies and sectors. Our allocation to some sectors is much lower than the market index.

The result: a broadly diversified portfolio of high quality companies

Our portfolio looks very different to the portfolio of a typical Australian shares manager. It’s far more diversified: while a typical manager might invest in just 20 to 30 companies, we invest in around 100 good quality companies. We also tend to include more small and medium-sized companies.    

Figures 1 shows how different the sector weightings in MLC’s strategy are to those of the S&P/ASX 200. In particular, our allocations to the banking and mining sectors are significantly lower.

Source: NAB Asset Management Services Limited.

There are also other differences in our strategy. Unlike many managers, we won’t compromise the quality of our holdings just to be fully invested. If there aren’t enough good opportunities available, we’ll hold cash rather than make inferior investments.

Sometimes we use derivatives to give us exposure to a high quality company if it has risks we want to mitigate. For example, a utilities company may have strong dividends and a stable outlook, but future regulatory changes in the sector could affect its share price. We may use derivatives to manage this risk.

An effective way to manage risk in volatile markets

Since we began managing the strategy, it’s fulfilled its role of providing broader exposure to Australian shares while limiting investors’ potential capital losses. In falling or volatile share markets, including those we saw in late 2018, the strategy has provided returns above the S&P/ASX 200 – in general, the weaker the market, the greater the strategy’s outperformance. And as expected, when share markets are rising, it has delivered returns slightly lower than the market.  

Over a full market cycle of around seven years, we expect the strategy’s returns will smooth out to provide returns at least equal to the market, but with much lower risk.

The Defensive Australian Shares Strategy illustrates how at MLC, we’re always searching for better ways to generate returns and manage risk. This often leads us to find original strategies for dealing with investment problems, which is especially important in today’s challenging investment environment.


At 31 December 2018.

At 31 December 2018.

Past performance is not a reliable indicator of future performance. The value of an investment may rise or fall with the changes in the market.


Important information

This communication is provided by MLC Investments Limited (ABN 30 002 641 661, AFSL 230705) (MLC), a member of the National Australia Bank Limited (ABN 12 004 044 937, AFSL 230686) (NAB) group of companies (NAB Group), 105–153 Miller Street, North Sydney 2060.  NAB does not guarantee or otherwise accept any liability in respect of any financial product referred to in this communication.
The information in this communication may constitute general advice. It has been prepared without taking account of individual objectives, financial situation or needs and because of that you should, before acting on the advice, consider the appropriateness of the advice having regard to your personal objectives, financial situation and needs.
You should obtain a Product Disclosure Statement (PDS) relating to the financial products mentioned in this communication issued by MLC Investments Limited, and consider it before making any decision about whether to acquire or continue to hold these products. A copy of the PDS is available upon request by phoning the MLC call centre on 132 652 or on our website at or MLC believes that the information contained in this communication is correct and that any estimates, opinions, conclusions or recommendations are reasonably held or made as at the time of compilation. However, no warranty is made as to the accuracy or reliability of this information (which may change without notice). MLC relies on third parties to provide certain information and is not responsible for its accuracy, nor is MLC liable for any loss arising from a person relying on information provided by third parties.
Past performance is not a reliable indicator of future performance.  The value of an investment may rise or fall with the changes in the market.  The performance returns in this communication are reported before deducting management fees and taxes.
This information is directed to and prepared for Australian residents only.
MLC may use the services of NAB Group companies where it makes good business sense to do so and will benefit customers. Amounts paid for these services are always negotiated on an arm’s length basis.