Only six companies dominate the Australian sharemarket, with the big four banks, a mining heavyweight and a phone company ruling the S&P/ASX300 Index, a new market update said.
The update from the State Street Global Advisors (SSgA) Active Australian Equities team found these companies (the big four banks, BHP, Telstra) occupy 44 per cent of the index weight and almost 50 per cent if the contribution to total risk is measured.
"Have a look at your active manager's top 10 holdings in Australian equities. We will bet these companies are all featured in that list," the report said.
"Tracking error constraints on active managers force them to hold these companies in the portfolio, whether they like them or not.
"Next time you hear your active manager telling you how overvalued the banks are and how risky that is, ask what total weight they are in the portfolio. If the weight is less than 20 per cent then it's our shout for lunch."
Almost half the risk of the benchmark comes from just six companies. These stocks have seen almost 50 per cent price-to-earnings (PE) expansion in two years without any earnings growth.
They are trading at a 20 per cent premium to their five-year average PE.
SSgA's Australia Managed Volatility Alpha strategy held less than 10 per cent in these six companies as at the end of November 2013.
Its positioning in banks has decreased over the last 12 months from around 12 per cent to just 4 per cent as at end of November.
Financials performed strongly in the Australian market this calendar year-to-date, returning over 32 per cent. The sector outperformed by another 1.6 per cent in November.
Financials accounted for 45 per cent of the total market capitalisation in the S&P/ASX 300 Index and contributed to over 69 per cent of the total performance this calendar year.
