The stocks investors needed to avoid underperforming the Australian share market…

There are more than 2,200 companies and securities listed on the Australian Securities Exchange (ASX), with a combined market value of more than $2.9 trillion.

Just 10 of those companies account for more than 40% of the ASX’s total capitalisation. They have a combined market value of around $1.2 trillion.

What’s more, these 10 companies are the ones investors would have needed to own since 2000 in order not to have underperformed the broader Australian share market.

Ranked by size, the companies in question, which have consistently been the biggest companies on the ASX since 2000, are BHP, Commonwealth Bank, CSL, NAB, Westpac, ANZ, Woodside, Wesfarmers, Macquarie Group, and Rio Tinto.

We’ve crunched the numbers based on the last 23 years of returns from the broader Australian share market. From 1 January 2000 to 30 June 2024, the S&P/ASX 300 Index (which tracks the top 300 listed companies) delivered an average annualised return of 8.23%.

Not holding any of the 10 biggest ASX companies during that time frame would have resulted in a 1.93% per annum lower return compared with a portfolio that held all of these companies.

That may not sound like a lot, but it is over around 23 years of returns. Consider that a $10,000 investment into an exchange traded fund (ETF) tracking the top 300 companies at the start of 2000 would have grown to $66,006 by 30 June this year. Without the top 10 biggest companies, that $10,000 investment would only have grown to $43,327, which is about a 34% lower return.

Australia’s biggest companies, and best-performing companies, have helped skew the total market’s returns over time.

Now, you may be thinking, instead of the biggest companies, what about the 10 consistently best-performing companies over the same 23-year period. How would they have made a difference to returns?

Interestingly, most of the companies in this list are the same as the 10 biggest companies. It also includes BHP, Commonwealth Bank, CSL, Wesfarmers, Macquarie Group, Rio Tinto, and ANZ. NAB, Westpac, and Woodside drop out and are replaced by Fortescue, Woolworths, and Sydney Airport.

Our research shows that not holding these 10 consistently top-performing companies over the 23-year time period would have led to a 1.48% per annum performance drag based on the total return from the S&P/ASX 300 Index.

We’ve dissected this even further. Here’s how not having each of the above companies would have detracted from the total return on an annual basis. For example, not having BHP would have led to a 0.42% annual performance drag.

Not holding BHP, Commonwealth Bank, or CSL would have resulted in a total performance loss of 0.93% per annum over the 23 years.

Understanding the market skew

One of the key things to understand about share market returns is that a subset of companies will typically have a bigger positive influence and skew a market’s total returns over time.

In the United States, think of the so-called Magnificent Seven stocks – Alphabet (Google), Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla – which have accounted for a big proportion of the strong returns on U.S. share markets over the last 20 months.

Undoubtedly, Australia’s biggest companies, and best-performing companies, have helped skew the total market’s returns over time.

Yet, the constituents of markets do change over time. Some companies, as a result of mergers and acquisitions, disappear and are replaced by others.

Also, today’s top-performing companies may not necessarily be top performers down the track. Past performance is not a guarantee of future performance, even for companies with a solid track record of delivering good returns.

So, whether it’s the top 10 biggest companies or the top 10 best-performing companies, it’s important to keep in mind that these lists can, and probably will, change over time.

That’s why casting one’s investment net widely makes good sense, and why broad market index funds and exchange traded funds (ETFs) that capture hundreds of companies, including the biggest ones, have become a key element in many Australian investors’ portfolios.

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