Plenty riding on fortunes of the big four

More and more people are banking on a comfortable retirement. Quite literally, more people have their retirement savings riding on the fortunes of the big four banks and the continuing good performances of their shares.

The combined market capitalisation of the major banks is about one-quarter of the total capitalisation of the Australian sharemarket. The big banks are one of the major drivers of the performance of the market overall.

The typical superannuation "balanced" investment option, where most people have their money, has about one-third of its money invested in Australian shares.

The growth in self-managed super funds (SMSFs) is also supporting the prices of bank shares. While there are more than 2000 shares listed on the Australian sharemarket, trustees of SMSFs invest mostly in a handful of blue-chip stocks.

SMSF administrator Multiport, in its June 30 survey of SMSFs, found that trustees put more than half their Australian shares allocation into just 10 companies. The 10 include the big four banks.

Almost 40 per cent of SMSF money is invested in Australian shares. It is understandable that SMSF trustees love the big banks. They keep producing record profits, pay growing dividends that are fully franked and their share prices have increased significantly.

The banks' shares can still be bought on dividend yields, after franking, of about 7 per cent when term deposits are paying interest of less than 4 per cent.

The appetite for big bank shares is set to increase as more large superannuation funds allow their members to invest directly in Australian shares.

Actuaries Rice Warner, in a recent research note, said a growing number of not-for-profit super funds were implementing "direct investment", which allows members to invest directly in term deposits and Australian shares.

Of 56 not-for-profit funds covered in the report, six had implemented direct investment, 11 were about to implement it and a further 11 funds were actively considering offering it.

Large superannuation funds are partly doing this to help stem the exit of members from their funds to start their own funds. Rice Walker finds those members of large funds using direct investments parallel those with self-managed super funds. They also have about 40 per cent of the money invested directly through their large super funds in Australian shares.

It would be surprising if these members of large funds using direct investment were not also mostly investing in the blue-chip stocks, such as the shares of the major banks.

Buying the banks for yield has proved a great move, with terrific capital gains as well. While there is no free lunch in investing, diversification comes close. What members of the large funds should remember is that they are already likely to have a large allocation to the major banks through their balanced investment option.

The cash rate is at a 53-year low. What would happen to the share prices of banks if interest rates started to rise, pushing up term deposit interest rates as well?

Twitter: @jcollett_money