Why are pension funds tracking indexes more closely?

  • JPMorgan estimates that the average active share of the Australian equity portfolios of the 12 large pension managers it tracks fell from 25.6% in December 2024 to 19.7% in June 2026, meaning that, on average, roughly four-fifths of their holdings track the index. Active share measures the difference between a portfolio's holdings and its benchmark.
  • The bank links the change to incentives created by regulatory testing: if a product fails the Australian Prudential Regulation Authority's performance test for two consecutive years, it cannot accept new members until it subsequently passes.
  • The test constructs a benchmark using the product's own long-term strategic asset allocation and compares investment returns and management fees; a combined result that trails the benchmark by 50 basis points or more per year constitutes a failure. As a result, active decisions that deviate from the benchmark can drag down the test result if they perform poorly.

How have large-cap trading and earnings-season volatility changed?

  • Pension funds already hold approximately 30.2% of the Australian All Ordinaries Index by market capitalization. JPMorgan believes that as these funds track the index more closely, combined with deeper passive-investment penetration, market trading turnover will decline and price volatility during earnings season will increase.
  • Measured by trading value relative to market capitalization, turnover in the ASX 50 has roughly halved since October 2006, while turnover in the ASX MidCap 50 fell 29% over the same period. Small-cap turnover has returned to its average over the past 20 years, broadly consistent with pension funds retaining more active risk in mid- and small-cap stocks.
  • In February 2026, 38% of ASX 200 constituents experienced moves of at least 3 standard deviations on their earnings announcement day; in August, the proportion remained at 32%. JPMorgan noted that both levels were higher than those during the global financial crisis and the pandemic.

Where are active stock selection and sector adjustments concentrated?

  • Weighted by assets under management, active share is only 11% for the top 20 stocks by market capitalization, 24% for those ranked 21 to 50, and rises to 49% for those ranked 201 to 300; scope for active deviation from the index is concentrated in mid- and small-cap stocks.
  • Most major funds tracked by JPMorgan remain underweight the ASX 50, but over the six months to June 2026, the underweight narrowed by 196 basis points to 198 basis points. Stocks ranked 21 to 50 by market capitalization are the most heavily overweighted group, with BSL, JHX and QAN among the high-conviction overweight positions listed by the bank.
  • In the first half of 2026, the relative allocation to financials rose by 61 basis points, of which banks contributed 43 basis points; the relative allocation to materials fell by 87 basis points. The underweight in financials has narrowed by 121 basis points over the past two years, and JPMorgan believes this structural reallocation is nearing its end.

As pension assets grow, where are allocations shifting?

  • Total assets in Australia's pension system are approximately 4.8 trillion Australian dollars, equivalent to 157% of nominal GDP; the ratio was 147% in 2025. Mandatory contributions, long-term investment returns and the system's maturation have together driven asset growth.
  • In the year to June 2026, global equities' share of fund assets rose by 254 basis points, while cash and domestic equities fell by 115 and 48 basis points, respectively.
  • Over the most recent six months, domestic equities' share of assets fell by 58 basis points to 22.9%, while global equities rose by 44 basis points to 32.8%. Within domestic equity portfolios, however, funds slightly reduced their underweight in the top 20 stocks over the same period: reducing the overall allocation to domestic equities and adjusting the weight of large-cap stocks within them are decisions at two different levels.