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Is buying blue-chip shares a loser’s game?

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Blue-chips should represent the best bang for your risk-adjusted dollar but our best and biggest enterprises have left investors looking like fools – and not in a good Motley Fool kind of way!

The share price collapses of our biggest telecom operator Telstra Corporation Ltd (ASX: TLS), our most expansive wealth advisor AMP Limited (ASX: AMP) and Australia’s largest mortgage lender Commonwealth Bank of Australia (ASX: CBA) have epitomised the disastrous outcome from the blue-chip strategy in FY18.

I cannot remember a time when this many blue-chips have been cast into the sin-bin at the same time! This is leading some experts to question if investing in blue-chip stocks will continue to be a loser’s game in the new financial year.

It doesn’t help that large caps are lagging small caps either. The S&P/ASX 100 (Index:^ATIO) (ASX:XTO) may be up around a respectable 6% (before dividends) since the start of FY18, but that pales to the 20% jump by the S&P/ASX SMALL ORDINARIES (Index:^AXSO) (ASX:XSO) index.

What’s also adding to the growing negative sentiment towards the big end of town is the fact that the best performing stocks on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) are from fairly new entrants to the index, such as milk supplier A2 Milk Company Ltd (ASX: A2M) and cloud accounting software provider Xero Limited (ASX: XRO), and not the more established large caps.

Experts quoted by the Australian Financial Review have accused our blue-chip companies of becoming too complacent as the boards of these companies believe their market dominance will guarantee perpetual profit growth.

The AFR also quoted one fund manager saying that investing in the big cap index has not worked and even if you factored in our world-beating dividend yields, investors would still be underperforming global peers since the GFC.

The bad corporate behaviour of our financial giants that have been exposed at the bruising Banking Royal Commission has also reinforced the view that top executives are overpaid, but are under delivering when it comes to looking after their customers and shareholders.

But don’t give up on blue-chips just yet. The strong gains by blood plasma supplier CSL Limited (ASX: CSL) and investment bank Macquarie Group Ltd (ASX: MQG) prove that investing in blue-chips can still be a winning strategy.

When it comes to picking the wheat from the chaff, investors should look for blue-chips that are continually re-inventing themselves and have a track record to show for that. This means launching new products or services and restructuring underperforming divisions.

While some would argue that some of the floundering blue-chips like Telstra have been doing that (you probably won’t find a large organisation that isn’t claiming to be doing this), they don’t have a particularly good track record of driving superior shareholder returns from new initiatives.

CBA may have been able to generate strong returns but I would argue that it isn’t from new innovations but mainly from the structure of the market that it dominates.

What this means is that investors cannot afford to “buy and forget” because they will suffer from the same issue of complacency that our senior corporate executives are being accused of.

Taking this point on board, what are the stocks that are displaying the qualities of having a capable management team?

In my view, it’s stocks like jewellery retailer Lovisa Holdings Ltd (ASX: LOV), travel agent Flight Centre Travel Group Ltd (ASX: FLT) and bathroom products group Reece Ltd (ASX: REH) that fit this bill because they are or have successfully overcome challenging market conditions to emerge as stronger companies.

The experts at the Motley Fool also think there are three other blue-chips that are well placed to outperform. These stocks are their key picks for 2018 and you can find out what they are for free by following the link below.

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Returns as of 6th October 2020

Motley Fool contributor Brendon Lau owns shares of Macquarie Group Limited. The Motley Fool Australia owns shares of and has recommended Flight Centre Travel Group Limited and Telstra Limited. 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 Scott Phillips.

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