March Issue Brief - Going Global: A Look at Public Company Listings

Trivia time: how many stocks make up the Wilshire 5000
Total Market Index (a widely used benchmark for the US equity market)?

While the logical guess might be 5,000, as of December 31, 2016, the index actually contained around 3,600 names. In fact, the last time this index contained 5,000 or more companies was at the end of 2005.[1] This mirrors the overall trend in the US stock market. In the past two decades there has been a decline in the number of US-listed, publicly traded companies. Should investors in public markets be worried about this change? Does this mean there is a material risk of being unable to achieve an adequate level of diversification for stock investors? We believe the answer to both is no. When viewed through a global lens, a different story begins to emerge—one with important implications for how to structure a well-diversified investment portfolio.

U.S. AGAINST THE WORLD

When looked at globally, the number of publicly listed companies has not declined. In fact, the number of firms listed on US, non-US developed, and emerging markets exchanges has increased from about 23,000 in 1995 to 33,000 at the end of 2016. (See Exhibit 1.)

It should be noted, however, that this number is substantially larger than what many investors consider to be an investable universe of stocks. For example, one well-known global benchmark, the MSCI All Country World Index Investable Market Index (MSCI ACWI IMI) contains between 8,000 and 9,000 stocks. This index applies restrictions for inclusion such as minimum market capitalization, volume, and price. For comparison, the Dimensional investable universe, at around 13,000 stocks, is broader than the MSCI ACWI IMI.

Exhibit 1.       Number of Publicly Listed Companies

Source: Bloomberg

While it is true that in the US there are fewer publicly listed firms today than there were in the mid-1990s (a decrease of about 2,500), it is clear that the increase in listings both in developed markets outside the US and in emerging markets has more than offset the decline in US listings. Although there is no consensus about why US listings have decreased over this period of time, a number of academic studies have explored possible reasons for this change. One line of investigation considered if changes in the regulatory environment for listed companies in the US relative to other countries may explain why there are fewer listed firms. Another considered if, since the 2000s, private companies have had a greater propensity to sell themselves to larger companies rather than list themselves. In either case, the implication for investors based on the numbers alone is clear—the number of publicly listed companies around the world has increased, not decreased.

A GLOBAL APPROACH

In the US, with thousands of stocks available for investment today, it is unlikely that this change will meaningfully impact an investor’s ability to efficiently pursue equity market returns in broadly diversified portfolios. It is also important to note that a significant fraction of the publicly available global market cap remains listed on US exchanges. As noted in Exhibit 2, the weight of the US in the global market is approximately 50–55%. For comparison, it was approximately 40% in 1995.

For investors looking to build diversified portfolios, the implications of the trend in listings are also clear. The global equity market is large and represents a world of investment opportunities, nearly half of which are outside of the US. While diversifying globally implies an investor’s portfolio is unlikely to be the best performing relative to any one domestic stock market, it also means it is unlikely to be the worst performing. Diversification provides the means to achieve a more consistent outcome and can help reduce the risks associated with overconcentration in any one country. By having a truly global investment approach, investors have the opportunity to capture returns wherever they occur.

Exhibit 2.       Percent of World Market Capitalizations as of December 31, 2016

Data provided by Bloomberg. Market cap data is free-­float adjusted and meets minimum liquidity and listing requirements. Many nations not displayed. Totals may not equal 100% due to rounding. China market capitalization excludes A-shares, which are generally only available to mainland China investors.

CONCLUSION

While there has been a decline in the number of US-listed, publicly traded companies, this decline has been more than offset by an increase in listings in non-US markets. While the reasons behind this trend are not clear, the implications for investors today are clearer—to build a well-diversified portfolio, an investor has to look beyond any single country’s stock market and take a global approach.

[1]. Source: Wilshire Associates.

Source: Dimensional Fund Advisors LP.

Past performance is no guarantee of future results. There is no guarantee an investing strategy will be successful. Diversification does not eliminate the risk of market loss. Investing risks include loss of principal and fluctuating value. International investing involves special risks such as currency fluctuation and political instability. Investing in emerging markets may accentuate these risks.

All expressions of opinion are subject to change. This article is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services.

Indices, such as the MSCI All Country World Index Investable Market Index (MSCI ACWI IMI) are not available for direct investment.

[1]. Source: Wilshire Associates.

Step Out of Your Shadow - Recognizing Investment Bias

Imagine you have spent your entire life chained to a wall in a dark cave. The chains constrain you in such a way that you are unable to turn around to see anything but the cave wall directly in front of you. There is a fire that burns behind you, providing your only source of light. When people, creatures, or objects pass between you and the fire, all you can see are their shadows on the wall. Over time, you recognize certain shapes and associate them with what you think cast the shadows. Eventually, you interpret them into a perception about how the world works.

But what would your view be of “reality” if you were suddenly released from this prison. How strange, or wrong, might the world then appear? This was a question posed long ago by Plato in the Allegory of the Cave. Plato used this story to illustrate how a philosopher, when freed from the shackles of bias, can better understand reality.

In some ways, we are all bound by our bias. Look no further than your social media feeds to see what many of your friends’ “reality” is tied to. These days, it has become almost impossible to keep up with friends’ and relatives’ latest game scores, lost teeth, or birthdays as Facebook has become a forum for sharing “fake” news. Which news is fake? It largely depends on your perception.

If you support immigration reform, you may be more likely to feel emboldened when you see a news story about an undocumented immigrant who has committed a crime. On the other hand, if a news outlet runs a story about how much more expensive some food crops would be if there weren’t migrant laborers, you may stop paying attention or change the channel. This is what is known as confirmation bias, where you have reached a conclusion and then seek out facts that support your belief while ignoring those that don’t.

Investors do this all the time. Many that believe the market is going to fall may give more credence to indicators that fit their bearish narrative. Bulls, however, may cherry pick any good news that bolsters their confidence. The ability to keep an open mind, even to facts that don’t support your world view, can make us better investors and more tolerable “friends”.

Do you feel moved by any of the recent highly publicized and attended protests? Perhaps you were experiencing some herding bias. Investors face similar experiences when there are significant market selloffs, where the tendency is to believe you are the only sucker left that hasn’t sold. Recently, some may be feeling left out as the stock market is hitting new highs seemingly every day.

Following the latest trends, social pressure to conform, or the mistaken belief that a large group must be right are all reasons herd bias happens. Recognizing the tendency to follow the crowd may help you avoid getting trampled.

Excited about making America great again? It’s not unusual to believe we are more likely to be successful (or less likely to fail) than probabilities or ultimate results suggest. For example, a 1977 survey of college professors showed 94% believed their work was above average.[i]  Many other studies have shown similar overconfidence, from college students believing they will outlive their peers[ii], business leaders that their company is more likely to succeed[iii], to people avoiding flu shots due to the belief they are less likely to contract the bug.[iv]

This is known as optimism bias, and similarly, investors suffer from it as well. Overconfidence in dot com stocks in the late 90’s and financials in the mid-2000’s led to two of the worst bear markets in generations. In fact, studies have shown that stock pickers commonly believe their purchases will do better than average.[v] 

Confidence can be a great thing when you are stepping into the batter’s box or going in for a big job interview. Failing to recognize when that optimism has risen to excess can lead to expensive mistakes and failures.

What all of this tells us is that we’re all biased, it’s how we’re wired. By being aware that we are inclined to act in ways that are counter to our intellect, judgment, and even our values, we can come out of the shadows and actually see the light.

[i] Cross, P. (1977). Not can but will college teaching be improved? New Directions for Higher Education

[ii] Weinstein, N.D. (1980). Unrealistic optimism about future life events. Journal of Personality and Social Psychology

[iii] Cooper, A.C., Woo, C.Y., & Dunkelberg, W.C. (1988). Entrepreneurs’ perceived chances for success. Journal of Business Venturing; Larwood, L., & Whittaker, W. (1977). Managerial myopia: Self-serving biases in organizational planning. Journal of Applied Psychology

[iv] Larwood, L. (1978). Swine flu: A field study of self-serving biases. Journal of Applied Social Psychology

[v] Odean, T. (1998). Volume, volatility, price, and profit when all traders are above average. Journal of Finance