Michael Mauboussin and the team at Credit Suisse Global Financial Strategies recently published a report on The Incredible Shrinking Universe of Stocks – The Causes and Consequences of Fewer U.S. Equities. It’s a fascinating read.
The report states:
- There has been a sharp fall in the number of listed stocks in the U.S. since 1996.
- While listings fell by roughly 50 percent in the U.S. from 1996 through 2016, they rose about 50 percent in other developed countries. As a result, the U.S. now has a listing gap of more than 5,800 companies.
- The propensity to list is now roughly one-half of what it was 20 years ago. The net benefit of listing has declined.
- Mergers and acquisitions (M&A) are the leading reason for delisting, and initial public offerings (IPOs) are the primary source of new listings. In the last decade, M&A has flourished while IPOs have floundered.
- Regulation has increased the cost of listing and facilitated meaningful M&A.
- As a consequence of this trend, industries are more concentrated and the average company that has a listed stock is bigger, older, more profitable, and has a higher propensity to disburse cash to shareholders.
- Exchange-traded funds have filled part of the list gap.
Here’s an excerpt from that report:
The number of listed companies in the U.S. rose 50 percent from 1976 to 1996 and fell 50 percent from 1996 to 2016. This has not happened in other parts of the world, opening a U.S. listing gap. This is important because the U.S. comprises one-half of the value of the world’s stock market.
A company’s decision to list involves weighing costs and benefits. Net benefits appeared to be positive in the first 20 years of this period and have turned negative in the last 20 years. As a result, delistings have exceeded new listings by a large margin since 1996.
Regulation appears to have played a role in two ways. The cost of being public, especially after the implementation of the Sarbanes-Oxley Act in 2002, has risen in the past two decades. That said, the shrinkage in the population of listed companies started well before that law was implemented. Further, relatively accommodative anti-trust enforcement allowed for robust M&A activity.
As a result, listed companies today are on average larger, older, and more profitable than they were 20 years ago. Further, they operate in industries that are generally more concentrated. The overall size and maturity of listed companies means they are more likely to pay out cash to shareholders in the form of dividends and share buybacks than companies were in the past.
We speculate that the maturation of listed companies has also contributed to informational efficiency in the stock market. Gaining edge in older and well established businesses is likely more difficult than it is in young businesses with uncertain outlooks. In turn, the greater efficiency may be one of the catalysts for the shift that investors are making from active to indexed or rule-based strategies.
The chief investment officer (CIO) of an institution in the mid-1970s could gain reasonable exposure to U.S. equities by investing in an early stage venture fund and a large market index such as the S&P 500 (itself not an easy thing to do at the time). Today, that CIO needs to participate in early-and late-stage venture capital, a private equity buyout fund, and the S&P 500. Only a few investors have access to all of these alternatives.
The universe of alternative investments, including venture capital, buyout funds, and hedge funds, has grown sharply in the past 20 years to provide some investors with access to more investment opportunities as well as to employ more sophisticated methods to generate excess returns. The growth of these asset classes has led to lower returns for investors.
Venture capital funds launched in the 1990s outperformed public markets. But funds started since 2000 have underperformed public markets, with an improvement in recent years. Buyout funds with vintage years before 2006 outperformed public markets, but those launched in the last decade have only equaled the returns of the market. Hedge funds have also seen diminishing excess returns in the past decade. The difference between the top and bottom performers is larger in venture capital than in buyout funds.
You can download the full report here.
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