Bursting with bank stocks

Index funds, LICs and top managed funds are laden with bank stocks...and you thought you'd lightened off.

Summary: Financial companies dominate the ASX200, with 37.56 per cent of the market capitalisation coming from this sector. Investors should keep track of their exposure to bank stocks, but this is made difficult for those exposed through index funds, managed funds and LICs, because it is not always easy to see holdings in the latter, while the former could provide more exposure than investors by mirroring the sector weightings of the index.

Key take-out: The banking sector presents its own risks, even though the Australian banking sector is well regulated and has a strong track record – investors should make sure they are comfortable with their levels of exposure both through individual share ownership and index funds and other managed investments.

Key beneficiaries: General investors. Category: Shares.

Much has been written about the end of the mining boom in Australia. Less, however, has been written about the way the end of the boom has changed the shape of the Australian share market – that has for so long dominated by mining and banking companies.

There was a time, not that long ago, that saw BHP as the biggest company listed on the ASX200, worth more than 10 per cent of the value of the market by itself. Now BHP is the only mining company among the ASX200’s top 10, with a market weight of less than four per cent. The dominant company now is Commonwealth Bank, worth a little under 10 per cent of the ASX200. Westpac, ANZ, Telstra and National Australia Bank follow this in size. Our ‘Big 4’ banks make up four of the biggest five listed companies in the Australian market.

In terms of the overall market (ASX200), Australia is dominated by financial companies, with 37.56 per cent of the market capitalisation from this sector. Materials are the next biggest sector (12.7 per cent), worth less than one third of the value of financial companies.

How much does market make-up mean to individual investors?

Investors who allocate some of their portfolio to index funds understand what they have in their portfolio – a collection of investments in the same proportion as those investments existing in the index. Knowing what is in their portfolio is less transparent for an investor who chooses an ‘active’ managed investment, like a Listed Investment Company (LIC) or managed fund.'

As an exercise to look “under the bonnet” of some more actively managed Australian share portfolios, the Australian Share holdings of two large fund managers (BT and Colonial) and two large LICs (AFIC and ARGO) have been chosen, and their top 10 holdings compared with the top 10 holdings in the ASX200 index at the end of February with these investment managers.

Table 1 – top 10 Holdings – index and managed investments

Index (End Feb)

Colonial First State Australian Shares (End November 2015)

ARGO (End February 2016)

BT Wholesale Core Australian Share Fund (End February 2016)

AFIC (End February 2016)

CBA 9.4 per cent

CBA 11.03 per cent

Westpac 6.9 per cent

Westpac 8.6 per cent

CBA 13.4 per cent

Westpac 7.5 per cent

Westpac 8.61 per cent

Telstra 4.9 per cent

ANZ 7.0 per cent

Westpac 10.7 per cent

ANZ 5.2 per cent

CSL 5.81 per cent

CBA 4.9 per cent

CBA 7.0 per cent

Telstra 6.6 per cent

Telstra 5.04 per cent

ANZ 4.56 per cent

ANZ 4.8 per cent

Telstra 5.2 per cent

Wesfarmers 6.5 per cent

NAB 5 per cent

Transurban 4.21 per cent

Wesfarmers 4.6 per cent

CSL 4.4 per cent

NAB 5.8 per cent

BHP 3.9 per cent

BHP 4.19 per cent

Macquarie 3.3 per cent

QAN 4.4 per cent

BHP 5.3 per cent

CSL 3.8 per cent

NAB 3.90 per cent

NAB 3.2 per cent

Macquarie 4.2 per cent

Transurban 5.0 per cent

Wesfarmers 3.45 per cent

Macquarie 3.88 per cent

BHP 2.9 per cent

NAB 3.5 per cent

ANZ 4.5 per cent

Woolworths 2.38 per cent

Henderson 3.70 per cent

Milton 2.6 per cent

Amcor 3.2 per cent

Amcor 4.1 per cent

Scentre Group 1.83 per cent

Aristocrat 3.67 per cent

Australian United Investments 2.5 per cent

21st Century Fox 3.1 per cent

CSL 4.0 per cent

The bottom line is that each of these portfolios bears more than a passing resemblance to the index portfolio – especially in terms of exposure to bank shares. Given the propensity for people to have a mix of managed investments and direct shares, and given the popularity with individual investors of holding some direct bank shares, it is easy to see how the already high weighting of bank shares in the overall market could be even higher in an individual’s portfolio.

Further to this, the following graph considers the top 10 holdings in the index and then each fund, looking at what proportion of their overall portfolio is held in banking shares from these top 10 holdings. It is interesting to note that ARGO is the only managed investment that has a smaller weighting to bank shares in their top 10 than the index.

The question is, to what extent should any investor be concerned about their exposure to Australian banking companies?

The risks of bank exposure

On face value, having high levels of exposure to Australian banks does not seem like such a bad thing. The Australian banking system seems to be well regulated, it has been a long time since any failures in the Australian banking system and the banks themselves continue to pay attractive fully franked dividends on the bank, off years of increasing profitability and current multi-billion dollar profits.

However, investors are also acutely aware of the systematic stresses that banks can face around funding, as seen during the Global Financial Crisis. Banks are not simple businesses, and the banking system is not a simple system. Fear around the reputation of a bank, or the banking system, can cause significant losses in wealth for investors.

Often investors think that a strong flow of dividends is a proxy for investment security. In some cases it can be – if companies are paying dividends out of a reliable earnings stream with costs, including interest costs, well covered by borrowings. I don’t think that banks, even with their strong dividend streams, should be considered in this category.

The decision for Australian investors is to decide what level of portfolio exposure that they are comfortable with in banks – and make sure that they understand the total exposure from both their own direct bank holdings and any managed investments that they own.


The weighting of banks in the Australian market (37.56 per cent) is about twice that of banks in the global share market of developed countries (excluding Australia – using a Standard and Poor’s Index) (18.47 per cent). It is possible that individual portfolios have exposure beyond this. The Global Financial Crisis provides a reminder of the risks of banks as investments. These risks, and the high weighting of banks in the Australian market, suggest that we as investors should be checking that we are comfortable with our exposure to bank shares in our portfolios.

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