Andrew Cassar
Australia’s equity market is becoming harder to trade in size, even when headline liquidity metrics look benign. Rising passive ownership and a shrinking actively traded free float are weakening price discovery and amplifying single-stock moves, with direct implications for portfolio construction and rebalancing.
JANA Investment Advisers’ latest research[1] examines the structural forces reshaping Australian equity markets, finding that the rise of passive ownership – compounded by regulatory changes and shifts in investor behaviour – is fundamentally altering market dynamics, liquidity, and volatility, with direct implications for portfolio construction.
As price-insensitive index flows have grown as a share of overall market activity, the nature of price discovery has fundamentally shifted. In periods of heightened volatility, including those currently being experienced amid elevated geopolitical uncertainty, these mechanical reallocations can intensify short-term swings as capital is pulled toward outperformers and pushed away from laggards.
The structural shift underway in Australian equities is likely to continue, with passive ownership expected to approach levels seen in Canada and the United States.
These dynamics appear structural rather than cyclical, suggesting that portfolio construction approaches developed under higher-turnover, more-liquid market conditions may warrant reassessment.
Implications for portfolio construction
For institutional investors, these dynamics point to lower market turnover, extending performance cycles and a greater role for momentum as a driver of returns.
While headline volatility will remain compressed at a surface level, underlying market behaviour suggests greater single‑stock volatility and tail risk.
As a result, tighter portfolio risk controls and more deliberate portfolio construction are becoming increasingly important, particularly amid a backdrop of declining investor tolerance for underperformance.
A blend of core and non-core exposures, styles, and investment timeframes is essential for managing risk and reducing reliance on any single return driver. Laddering investment timeframes can help improve resilience across market regimes and reduce concentration risk.
In this environment, both fundamental and systematic active managers continue to play a critical role in supporting price discovery and capturing inefficiencies that passive strategies cannot address.
Key findings
- Passive and index ownership has grown as a proportion of the S&P/ASX 300 register over the past decade, with the trend accelerating, though Australian passive penetration remains below the United States level of approximately 50%.
- The Your Future, Your Super regulatory reforms have had unintended consequences, driving greater adoption of enhanced passive and index-following strategies as superannuation funds respond to underperformance disclosure requirements.
- Free float turnover for the S&P/ASX 300 fell to 53% in 2024, well below the long-term of 78% since 2002, indicating structurally lower liquidity. In the banking sector, turnover has fallen further to just 33%, down from a historical median of 55%.
- Headline market volatility has compressed, while single-stock volatility has increased, and tails have grown fatter. Intraday trading ranges on earnings release days have risen sharply over the past three years as thin order books amplify price swings.
- Over the past decade to August 2025, M&A activity has far outpaced IPOs (168 M&A transactions above $100 million occurred, against only 67 IPOs). Combined with approximately $60 billion in on-market buybacks concentrated in Materials and Financials, the available free float and diversification opportunity set has materially reduced.
- The inherent momentum embedded in market-cap-weighted indices is being amplified by passive flows, reinforcing short-term price trends and intensifying stock-specific swings when catalysts emerge. The August 2025 reporting season provided clear illustrations: CBA’s continued premium re-rating despite a modest earnings beat, Woolworths’ ~12% fall on a double-digit profit decline, and Coles lifting over 8% on a clean result.
- While bid-ask spreads have narrowed across large, mid and small caps, this masks a more fragile liquidity environment beneath the headline metrics.
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Notes:
[1] The analysis in this article draws on market return, fundamental, and institutional ownership data sourced from FactSet, covering the S&P/ASX 300 constituent universe. FactSet is a leading global provider of integrated financial data and analytics, used by JANA for index-level return series, free float turnover metrics, institutional ownership categorisation (active versus passive), buyback and M&A transaction data, and historical volatility analysis. Additional context on intraday earnings-day trading ranges was sourced from UBS and Barrenjoey via Yarra Capital Management. All data is current as of the time of writing.
By Andrew Cassar, Head of Australian Equities