Investment Matters

But for just six companies the ASX300 return would be zero this fiscal year

The ASX 300 has increased in capital value by +5.6% (i.e. excluding dividends) for the financial year to date.

On face value, this performance seems to have been “ok”, but remove six companies’ performance and the market’s return would be about 0%.

These companies are (in order of contribution) CBA, Telstra, Transurban, Fortescue Metals Group, BHP and CSL (“The Six”).  We can see this in the magnitude of their returns over the year and their current valuations.  The market cap-weighted P/E of The Six is about 25, somewhat above the market’s long-term average of about 14.5.

ASX performance compressed into just six companies

Company Name

P/E

Total Return (FY-19 to 19/06)

Transurban Group

81.6

27%

CSL Ltd

35.7

13%

Telstra Corporation Ltd

19.0

50%

Commonwealth Bank of Australia

17.0

18%

BHP

14.2

23%

Fortescue Metals Group Ltd

7.5

116%

Source: IRESS, First Samuel

Granted, a market capitalisation weighted index normally attributes a high concentration of performance in a few names. However, the magnitude of this has been particularly pronounced this year, in comparison to previous years.

im2

Source: IRESS, First Samuel

The narrowness of the source of returns, we believe, speaks to the broader weakness of the market, particularly in many of the larger names. 

If we also strip away the handful of exuberantly promoted growth stocks that have outperformed this year (such as the WAAAXs – WiseTech, Appen, Afterpay, Altium and Xero) the performance of the market would have been negative.

The real irrational exuberance is in the WAAAX's

Company Name

P/E

Total Return (financial year to 19/06)

Xero Ltd

261

37%

Afterpay Touch

186

149%

Wisetech Global Ltd

110

86%

Appen Limited

20

109%

Altium Limited

46

49%

 Source: Reuters Eikon, IRESS, First Samuel

 Thus, the ASX300’s performance has been attributable to a select band of very large (and vulnerably priced) companies, boosted by a select band of optimistically priced growth companies.

IM3

Source: IRESS, First Samuel

Di-worsification?

Because indexes typically weight companies by their market capitalisation, this recent performance has resulted in passive investors becoming more concentrated in these names.

This highlights an issue with index investing, that is, portfolios can be concentrated in a few large names or sectors that have performed well, or are large in size.

It also means index investors can inadvertently become “performance chasers".

In times of dislocated performance (which we are seeing signs of in certain sectors), this can result in significant downside as the law of financial gravity brings exuberantly priced sectors and companies back down to earth.

 

-          Paul Grace