Speaking at their annual joint investment forum in Sydney last week, the contrarian fund managers warned Australian equity investors cannot afford to ignore valuation and concentration risks that exist in the ASX 300.
Simon Mawhinney, managing director and chief investment officer (CIO) at Allan Gray, noted that while the index offers exposure to a wide range of companies, just eight stocks dominated 85 per cent of the index’s returns in 2024 despite only representing 28 per cent of the overall market’s capitalisation.
Specifically, these were: CBA, NAB, ANZ, Westpac, Wesfarmers, Goodman, Aristocrat and Macquarie Bank.
Meanwhile, the remaining 292 companies delivered modest to very low returns in aggregate and look far cheaper compared to the index heavyweights, the CIO said.
“The Australian index is now extremely concentrated. Passive, index investors are currently knowingly or unknowingly allocating a huge part of their exposure to banks, which are trading at eyewatering valuations,” Mawhinney said.
“A purely passive approach may leave you exposed to heightened valuation risks at the moment.”
Elaborating on this, Simon Skinner, head of Orbis’ global investment team, said the current equity market narrative rewarding size and sameness has “little foundation” and is unlikely to benefit investors in the future.
“These messages – buy at any price, big is good, and persistent US exceptionalism – have sunk deep into the system. They are shaping how portfolios are built, how benchmarks are tracked and how stories about markets are told,” Skinner said.
“To be fair, they’re not without merit – they reflect patterns that have worked exceptionally well in recent years. But these patterns aren’t principles – they’re trends.”
As such, the global investment head encouraged investors to embrace more complexity and diversification in their portfolios to achieve greater outperformance.
“Diversification isn’t about holding more stocks. It’s about holding different ones and that takes conviction. We believe this is a moment to lean into it.
“This isn’t about avoiding the index. It’s about owning businesses that offer what the index cannot: independent drivers of return,” he said.
Last week, PM Capital founder and investment chief Paul Moore similarly argued passive dominance is not only inflating valuations of index-heavy names – such as CBA locally or the Magnificent 7 in the US – but it is also undermining the markets’ price discovery function.
“Passive allocations, particularly from industry super funds in Australia, continue to channel capital into concentrated holdings without regard to valuation or fundamentals,” the CIO told InvestorDaily.
According to Moore, several investment managers operating under the active label are actually “closet indexers”, which is to say they charge active fees despite hugging benchmarks. This, he said, is creating a systemic distortion where valuation signals are being ignored.
“This autopilot behaviour risks leaving investors exposed, especially as the macro backdrop (rising inflation, fiscal indiscipline and geopolitical realignment) becomes less forgiving of such complacency,” Moore said.
