Q.  We have read about the ASX accumulation index as a tool to manage a successful share portfolio. Can you please explain how it is possible to set up a successful portfolio under such terms?

A.  An accumulation index measures movements in the value of shares in the underlying index, including the reinvestment of dividends. As they include all growth and income attributable to a stock, they generally provide a better measure for aggregate performance than a straight price index such as the All Ordinaries index. They are a common measure used by Fund Managers to benchmark the relative performance of their fund portfolios.

Data is easily accessed on the most common accumulation indices on the Australian market:

  • ASX All Ordinaries Accumulation Index (XAOAI)
  • ASX 50 Accumulation Index (XFLAI)
  • ASX Midcap Accumulation Index (XMDAI)
  • ASX 200 Accumulation Index (XJOAI)
  • ASX 300 accumulation index (XKOAI)

Replicating the benchmarks can usually be done in 3 different ways; buying the equivalent Exchange Traded Fund (ETF) listed on the ASX, buying a managed fund replicating the index or buying a pool of shares that are included in the underlying index.  The most appropriate option will depend on your circumstances.

A word of warning, an index is a measurement tool and as such will not guarantee a successful portfolio.  Stocks are included in indices on the basis of their market capitalization.  No allowance is made for the future performance of the stocks.  As such an index will include both the “darlings” and the “dogs”.  Please also remember that shares move in and out of indices and have variable weightings on a regular basis depending on the relative performance and capitalisation of the listed stocks.

 

Originally appeared in The Australian