Funds Update

The bull's still running

The sharemarket's bull run continued in the first quarter of 2006

The March quarter closed with the Australian sharemarket setting a new record high. Both the Australian ASX 200 and All Ordinaries index hit 5000 during the last week of March 2006, a massive 80% rally in the three years since the market bottomed at 2800 in February 2003 with the start of the Iraq War.

The commodities boom – in particular China’s insatiable hunger – has been the main driver of the market’s phenomenal rise. Companies like BHP Billiton, Rio Tinto and Woodside have been the big contributers to the Australian sharemarket’s rise.

The siren-like call of the Australian sharemarket may be very tempting at this point, but, as explained in "Pass the Sirens by" article, it may be dangerous to have too strong a bias towards Australian shares.

Sustaining or increasing the upwards pace of the sharemarket will probably depend on Chinese and other developing nations’ demand for resources going forward. Also, the higher it goes, the more expensive it becomes to invest in the Australian sharemarket. Research conducted by Russell indicates that most investment managers are now looking offshore to capitalise on opportunities.

Having a well-diversified portfolio is more critical than ever – both to take advantage of emerging opportunities and safeguard the gains already achieved. The advantage of diversification is highlighted in the doubledigit growth of all of Russell’s Diversified Portfolios – even the most conservative of which delivered a doubledigit return in the year to 31 March 2006.

International shares (hedged) lagged Australian shares due to the fall in the Australian dollar during the quarter, but unhedged international shares actually did a bit better than Australian shares. International shares are now widely considered to offer the best growth opportunities and are favoured by 80% of investment managers, according to Russell’s latest Investment Manager Outlook (read the full report).

With this in mind, from 1 June 2006, the underlying asset allocation in the Russell LifePoints High Growth portfolio is changing. There will be more exposure to ‘aggressive’ international shares with the allocation increasing from 0% to 20% and reducing from 20% to 0% in unhedged international shares. On the same date, the portfolio’s exposure to Australian property will decrease from 10% to 5%, in favour of an increased international property allocation, which will increase from 0% to 5%.

Property securities continued to exhibit strength during the quarter, particularly overseas, but bond markets once again lagged the other sectors, with yields trading in a very narrow range.

View Russell SuperSolution performance as at 31 March 2006

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