It never ceases to amaze me that when I look at the top 20 Australian share holdings of many large public-offer superannuation funds, their selection of listed investments are almost identical to one another.
It's been written about numerous times before, but many of these 'top 20' lists are also uncannily similar to the makeup of the S&P/ASX 20 Index.
Whether it's the 'institutional imperative' of imitating peer investors' actions and stock selections, or merely a function of their size restricting them to the larger companies on the ASX, the reality today is that for many members of large superannuation funds, your Australian shares investment option is really no more than an investment proxy for the index as a whole.
What this means for fund members is that much of your money is being invested in particular companies simply because they're large without regard to the quality of the underlying investment (whether it be good, bad, or downright ugly).
The worst thing you can do then is to go and buy these same shares yourself because of the perceived safety of the company being in the 'top 20'.
Here are my top 3 stocks to avoid:
QBE Insurance Group Ltd (ASX: QBE)
Weighed down by an aggressive overseas expansion strategy, led by Mr Frank O'Halloran, chief executive from 1998 to 2012, the company has been dealing with the fall-out of its many overseas acquisitions since his resignation. Despite the company's market-darling status between 2001 and 2006, when the shares rose from $6 to a peak of $35.49, it's been a steady downward decline since then and long-term shareholders have not been adequately rewarded for the risk they've been taking on. QBE's compound annual growth rate has been an abysmal 6.60% over the last 15 years.
Whilst it's possible (maybe) that QBE has finally turned the corner under the current leadership of Mr John Neal, I remain to be convinced and I'd avoid the company's shares until management can demonstrate a sustained improvement in earnings-per-share.
AMP Limited (ASX: AMP)
A highly diversified wealth management, financial advisory and life insurance company, it's a business with strong brand recognition and reasonably good market shares in its various product markets.
However, it has struggled to take advantage of this and its earnings over the last 10 years have been so anaemic that today the market values the company less than what it was in 2006. For the last 10 and 15 years, the average annual return (inclusive of dividends) has been 0.81% and -3.32% respectively.
Rio Tinto Limited (ASX: RIO)
Predominantly an iron-ore play these days, this is a highly cyclical and capital-intensive business which has provided a compound average annual growth rate of 9.67% over the last 15 years.
A significant contributor to Rio's problems though was removed when the Rio board asked Mr Tom Albanese (the former CEO) to resign in 2013. I have a lot of respect though for the current and soon-to-be-retiring CEO, Mr Sam Walsh, who has done his best to right the ship.
Many would argue that Rio is a stock that should be traded and perhaps not held for the long term given its cyclical nature. Perhaps this argument is correct and this is why I query how such a stock should be, on average, the 15th largest holding in many large superannuation funds.
Foolish takeaway
Clearly, large investors operate in a different universe to the average retail investor which, incidentally, is the source of your advantage. The problem remains though for members of large superannuation funds as they're being forced to invest in companies which are a death-knell for capital.
If you can avoid companies like the ones referred to above for your own portfolio, you'll have greatly enhanced your chances in complying with Warren Buffett's 'Two Rules for Investing': 1) Never lose money, and 2) Never forget rule number 1.
