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What Is The All Ordinaries Index?

Written by Ivan Fletcher

When it comes to investing in share markets, the inclusion of an Index Based exposures is a great starting point of any portfolio and is often the benchmark for any actively managed portfolios but very few understand what this entails.  Today we break down the All Ordinaries Index to give you a better perspective, including identifying the natural bias within Australian Index weightings.

The Many Versions of the All Ordinaries Index

The original All Ordinaries Index comprises the top 500 stocks.  However, in some cases you will see references to reduced versions such as  S&P/ ASX 200  (top 200 stocks only) or S&P/ ASX 300 (top 300 stocks), which is the example I have used for this article.  Also, all numerical data is based on index holdings and values as at 30 December 2022  (information supplied by Vanguard).

How is the Index Constructed

There are other criteria for the inclusion of new companies into the index but when it comes to rankings and weightings, it is the size of the company.  Simply put, the traditional Index is based on SIZE.  For our traditional Index, size is measured by  Market Capitalisation.

Market Capitalisation = Shares on Issue x Current Market Price

Step 1   – Measure Size (Market Cap) of each Company

Based on 30/12/22 Data, the top 3 stocks on the All Ords S&P/ASX 300 index were :

  • BHP = 5,065,821,000 shares at price of $45.63 = $231 Billion
  • CBA = 1,694,524,000  shares at price of $102.60 =   $174 Billion
  • CSL =  482,216,000  shares at price of $287.76 =  $139 Billion
  • Top 300 Companies Total Market Cap =  $2,140,936,001,738 ($2.14 Trillion)

 As you can see stock price can have a significant influence on the market capitalisation.
CSL has increased in Market Cap considerably on the back of price growth with the share price having increased  by 83% in the last 5 years, compared to CBA 29%  and BHP 52%.

Step 2   – Weight Each company based on their Size (Market Cap)

  • Top 10 Company Weightings of the 300 Index as follows :

  • The 50th ranked Stock (Medibank Private) represents 0.38% of the Index
  • The 100th ranked Stock (Champion Iron Ltd) represents 0.13% of the Index
  • The 200th ranked stock (Growthpoint Properties Aust.) represents just 0.04% of the Index
  • These index weightings are then represented in any national ‘Index’ portfolio with each share weighting in the portfolio according to these Market Cap weightings.
  • The reporting of the index is converted to a points measurement system as you see it reported in the media for day-to-day movements, but the index weightings are the same (as depicted above).

Weighting Outcomes

  • As you can see just 10 stocks comprises almost half the index weighting, which effectively means that the ‘heavy weights’ can significantly influence the Index results.
  • The following chart demonstrates the weightings in pecking order, Top 10, Top 20, 50 etc.

Index Bias

  • As demonstrated above (just 10 Australian stocks (3% of the top 300) account for nearly half (47.5%) of the weightings in the Australian S&P/ASX 300 Index.
  • The Top 200 accounts for 97.6% of the index which means the last 100 companies accounts for only 2.4% of the Index.
  • The top 5 banks represent 22.5% index (CBA ANZ WBC NAB & MQL)
  • The top 7 Mining and Resources Companies represent 20.4% of index
    (BHP Woodside, Rio, Fortescue Santos, Newcrest Mining, South 32)

The above demonstrates a strong bias in Australia to the Banking and Mining/Resources sector and as a consequence, our Index performance results (good or bad) are heavily influenced by these 2  sectors.

It should also be noted that Australia is only 2% of the world weightings in comparison.

Whilst Australia’s Index bias to heavy weightings has generally served Australians well on the whole,  it is enough reason on its own to warrant diversification (in our super for example) into investment options that do not have the same bias as the Australian Index,  including Global managers which is a much deeper universe of investments (the other 98% of the world) with less dominant individual company weightings as well as alternative Active investment managers in Australia that do not HUG the traditional index weightings.
Source : Vanguard 30 December 2022

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