Index Fund investments are mirror images of the entire investing universe. For example, an Australian Shares Index Fund consists of about 200 or 300 investments in each of the largest companies on the ASX weighted by market capitalisation. People invest in Index Funds usually for two reasons. Firstly, simplicity. You do not have to choose particular investments as you own them all and secondly Index Funds, being passive investments, are inexpensive.
What has been interesting of late is the under-performance of the top 20 ASX listed companies (as represented by the iShares ETF S&P/ASX 20) relative to the broader market, being the S&P/ASX 300 TR Index. The top 20 companies on the ASX account for around 75 per cent to 80 per cent of the return of the index and since the 1st July 2015 to the end of October 2015 this part of the market has performed poorly, returning negative 5.71 per cent against the broader index of negative 2.33 per cent. This is probably not surprising given the large declines in some of the materials companies, some of the banks and the likes of Woolworths.
Montgomery does not consider many of the businesses that make up the top 20 as true “blue chips”. Why invest in companies just because they are big? Remember at Montgomery we only invest in businesses that are high quality, display bright prospects and where we can purchase them below our estimate of intrinsic value. Many of the companies in The Montgomery Fund (and the Montgomery [Private] Fund) are currently outside of the top 20 and the difference in performance can be seen more recently in Chart 1 and since inception (17/8/12) in Chart 2.
In summary, don’t be lulled into a false sense of security always thinking big is beautiful and please ensure every company held in your portfolio has an investment rationale. Don’t be afraid to look different to the pack.