The Australian share market has had three years of stellar growth, smashing all-time records and providing fund managers and their investors with 20-plus per cent returns.

Even the most unspectacular-looking Australian equities funds provided investors with a better than 10 per cent gain on their money.

Australian equities returned an impressive 24.5 per cent for the year to December 31, 2006, with blue chip resource, banking and consumer discretionary stocks leading the field.

"The market generally favoured growth over value-style managers in 2006, especially those maintaining overweight allocations to resource stocks," Morningstar investment consultant Sallyanne Cook says.

Large-cap growth-style funds produced on average a return of 23.1 per cent for calendar 2006, while the average return from their value-style counterparts was 21.4 per cent.

Small-cap funds outshined their larger counterparts with an average return of 34.2 per cent.

OVERLAYING CLASS WITH STYLE

Standard and Poor's head of Australian equities Marcus Hanel says talking about styles in the Australian equity market is a bit misleading.

"None are really true to label at all, but this does give advisers more confidence that they are getting diversification of styles by getting a watering down of the conviction of the managers that they are using," Hanel says.

The limited size of the Australian equity market means often the same stocks will be held by different style managers.

"If you are in the US market where they have 10,000 stocks, growth and value managers will be invested in a completely different set of stocks and that's real style diversification," Hanel says.

Advance Asset Management senior investment strategist Felix Stephen says there has been a shift out of equities into what can broadly be described as growth assets, whether it be commodities or infrastructure.

"We recently did our strategic allocation review a couple of months ago. The shift from domestic equities into alternate assets and a shift globally into debt instruments from equities was most apparent," Stephen says.

"On a strategic allocation basis measured over 10 years against other assets, we find that domestic equities are still attractive, but when you apply it on a tactical allocation basis, where markets are analysed over a quarterly or annualised basis, there is a definite shift taking place."

Other factors external to pure valuation analysis come into play, such as mergers and acquisitions, leveraged buyouts and price momentum, he says.

"The Middle East, plus the election years and the resultant fiscal policy, which if we look at historically tends to be loose around this time, is trying to sweeten the honey trap to voters. All will play a part," he says.

"Saying all this, if you look at the Australian market at these levels it still appears to be at fair value and appears to be sitting at a point where it would be driven by external factors." STILL ROOM TO GROW

For others, the recent good run for Australian equities is set to continue, albeit at a slightly more restrained pace.

"It's still a bull market and I think the topdown view is that markets are still going pretty well globally. It's hard to get bearish on equities when growth is expected to be around 5 per cent," Platypus Asset Management director Don Williams says.

Williams says Australian equities will ride on the back of a continuing positive trend in global equities.

PEAK HAS COME FOR SOME

Schroders head of Australian equities Martin Conlon has a different view.

Conlon believes the Australian market is almost fully valued and a more cautious view warranted in the year ahead.

"There is nothing based on historic metrics that looks unusually cheap. In that context we are pretty cautious on Australian equities relative to bonds and relative to property trusts and real estate," he says.

"Company prices appear to be going up, despite an absence of cash flows or profits rising at the same pace.

"Overall you need to keep things in a relative perspective, that's why we aren't super bearish on the Australian market, just on the fact that the multiples you are paying for stocks has expanded a bit, but not outrageously, particularly compared to other asset classes."

Investors should take another look at look how their funds are invested as the emergence of hedge funds in retail asset allocation and the unconstrained investment processes they use have challenged the traditional country-only allocation criteria, he says.

"Certainly our view is that people are going to have to get their head around the fact that it isn't very sensible for investors to allocate on the basis of countries any more, as just because you are buying a company based in Australia it doesn't mean you are buying Australian earnings," he says.

"Hedge funds have probably led the trend toward unconstrained investment universes as they can invest in whatever assets in whatever markets they like and they charge people a pretty heavy price for that privilege."

Long-only managers could go the same way for a much lower price and start to be a little less restricted in where they can invest, he says.

"We do exactly what a hedge fund does but charge less for it and have a more restrictive mandate," he says.

Hanel says the way licensees prescribe portfolios and asset allocations to clients is relatively flawed across the board.

"You should have equities, bonds and alternative, not Aussie, equities, international equities, Aussie fixed interest and global fixed interest, et cetera," he says. THINK GLOBALLY

Hanel says it does not make sense for investors to get hung up on companies just because they are Australian. Investors need to be looking for the best funds and stocks, whether they are here or overseas.

"It's like the listed property trust market and the overweight to Westfield, and it's the same in the Aussie share market, based on banks and resources," he says.

"Currently it's easier for the adviser to sell the client an equities story if they recognise a few of the names, especially if they have a specific tax need.

"You should be in the market that provides the greatest value to you. Advisers would be doing their clients a great service if they were taking a more global perspective."

"I'm not sure we can continue to outperform year in year out, but I still think we are going to get a double-digit return this year," he says.

"Recent data in the US has been good, but they've just had a property market crash and I don't feel they have really worked it through the economy yet.

"My most likely scenario is that the US doesn't do anything with rates and keeps it neutral and hopefully that is the result in Australia as well, but we seem to have more pressure on rates here than obviously the US."

With US and Europe returns estimated in the mid-teens and Australian returns estimated to be in the low to mid-teens, then taking into account the currency risk, a 12-15 per cent return out of Australia is as good as a 15-18 per cent return in real terms, he says.

"There still appears to be the ability for managers in Australia to generate alpha compared to other markets. I'm not quite sure why; it may be that the market is not really that mature yet," he says.