Why it pays to be a stock picker

2017 hasn't been the year it might have been for index trackers. I examine why, and the lessons investors can draw from it.

| More on:
a woman

You鈥檙e reading a free article with opinions that may differ from The Motley Fool鈥檚 Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

2017 hasn't been the year it might have been for index trackers. I examine why, and the lessons investors can draw from it.

I always find it astonishing that just 20 stocks make up just under half of the entire Australian equity market. Five of those stocks – the big 4 banks plus BHP Billiton Limited (ASX: BHP)聽– make up 25% in their own right.

That feeds through directly into the major indices that funds benchmark themselves against – the ASX100, 200 and 300. Take the ASX100. In the last year it's returned a reasonable 7.4%. But delve a little deeper and you'll find that 64 stocks in the ASX100 have done better than that, including 20 stocks that are up 30% or more.

The lag factor ? The big 5. The performance of the banks has ranged from +1.8% for聽National Australia Bank Ltd (ASX: NAB) to -3.5% for聽Australia and New Zealand Banking Group (ASX: ANZ). For all the strong resources performers out there, BHP itself is only up 4.3%.

In other words this has been the year of the stock picker. If you had been in Northern Star Resources Ltd (ASX: NST) instead of index weighted to BHP, you would be up 64%. If you had bought financial stocks聽 like Challenger Ltd (ASX: CGF) or Macquarie Group Ltd (ASX: MQG), rather than being restricted to the big 4, you would have seen gains of 28% and 18%.

This raises an interesting point. Do you actually need the safety or liquidity of those 5 largest stocks ?

I would argue that for the typical private investor it's simply not necessary. Challenger, for example, is capitalised at $8.5 billion. The business is solid enough for any investor to sleep soundly at night, and if the market did crash, you would have no trouble selling it if you needed to.

For an institution with a mandate to invest, say, in ASX 200 stocks, its main preoccupation is not going to be finding the multitude of gems that add the real value. It's going to be deciding its weightings in the top 5. It simply can't afford to diverge too far from its benchmark index. That's why so many "active" funds are no more than closet index trackers.

For the engaged investor, there are potentially much better returns out there, as 2017 has shown.

Motley Fool Australia contributor James Middleweek does not own shares in any of the companies mentioned in this article. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on 鈴革笍 Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more

woman holds sign saying 'we need change' at climate change protest

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
鈴革笍 Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
鈴革笍 Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more

asx investor daydreaming about US shares
鈴革笍 How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more

鈴革笍 Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more