Your fund and the shrink­ing stock mar­ket

Daily Local News (West Chester, PA) - - BUSINESS - By Stan Choe AP Busi­ness Writer

More com­pa­nies don’t want you, or any other in­vestor, to buy their stock.

In­stead of list­ing their shares on a stock ex­change, busi­nesses are go­ing pri­vate or never go­ing pub­lic in the first place. Se­cu­rity com­pany ADT, for ex­am­ple, pulled its shares off the mar­ket this spring af­ter go­ing pri­vate in a nearly $7 bil­lion buy­out. Uber, mean­while, makes it sim­ple for cus­tomers to hail a car, but in­vestors can’t eas­ily buy a piece of the pri­vately held com­pany, which is val­ued at more than $60 bil­lion.

The num­ber of pub­licly traded U.S. stocks has been on the de­cline since the dot-com bust, and there are now only about 3,300 listed in the Cen­ter for Re­search in Se­cu­rity Prices’ database. That’s down by roughly half since the late 90s, and it’s the low­est num­ber since 1984, when the U.S. pop­u­la­tion

was about three-quar­ters the size it is to­day.

For com­pa­nies, go­ing or stay­ing pri­vate means they can more eas­ily ig­nore the whims of Wall Street an­a­lysts and short-term traders who fo­cus on this quar­ter’s num­bers rather than long-term growth. Com­pa­nies may also be feel­ing less in­clined to sell their stock in an ini­tial pub­lic of­fer­ing when they can in­stead raise cash cheaply by bor­row­ing at close to record-low in­ter­est rates.

But while the trend may be good for CEOs, it’s also lim­it­ing the menu of choices avail­able to in­vestors and to the mu­tual-fund man­agers they hire.

“The U.S. equity world is be­com­ing smaller and smaller, and this could be one of many rea­sons why ac­tive man­agers are lag­ging be­hind their in­dexes,” Steven DeSanc­tis, an equity strate­gist at Jefferies, wrote in a re­cent re­port.

With fewer com­pa­nies to choose from, it’s be­com­ing more dif­fi­cult for fund man­agers to dif­fer­en­ti­ate their port­fo­lios from oth­ers and to jus­tify the fees they charge. Not only are fewer com­pa­nies pub­licly traded, but many of the com­pa­nies that still list on ex­changes have fewer shares avail­able to trade than be­fore.

With bil­lions of dol­lars in the bank and the cost of bor­row­ing close to record lows, com­pa­nies have been on a buy­back binge in re­cent years. They’re re­pur­chas­ing their shares to elim­i­nate them, which gives their per-share earn­ings a boost at a time when the global econ­omy is still grow­ing only slowly.

Ap­ple, for ex­am­ple, has 17 per­cent fewer shares avail­able in the mar­ket than five years ago. It and the other busi­nesses across the Stan­dard & Poor’s 500 in­dex spent a to­tal of $572 bil­lion last year on share re­pur­chases.

Fund man­agers have been com­plain­ing for years that big stim­u­lus pro­grams by cen­tral banks around the world have caused stocks to in­creas­ingly move to­gether in herds, both up and down,

which di­lutes the re­wards for pick­ing stocks. The more lim­ited menu of op­tions means fund man­agers are in­creas­ingly chas­ing af­ter the same op­por­tu­ni­ties. So per­haps it shouldn’t be a sur­prise that few are able to dis­tin­guish them­selves. There are more than 2,000 mu­tual funds fo­cus­ing on U.S. stocks alone, ac­cord­ing to Morn­ingstar.

Only 15 per­cent of all large-cap stock funds were able to tie or beat the S&P 500 over the 10 years through the end of June, ac­cord­ing to a re­cent tally by S&P Dow Jones In­dices. The num­bers are even worse for man­agers of small-cap and mid-cap funds. Only 9 per­cent of man­agers in ei­ther cat­e­gory were able to beat their re­spec­tive in­dexes, the S&P Small­Cap 600 and S&P Mid­Cap 400, over that decade.

The trend has been dif­fer­ent in other coun­tries,

par­tic­u­larly those whose economies have been open­ing up in re­cent years. The num­ber of pub­licly traded In­dian com­pa­nies has more than quadru­pled from 1,295 in 1984, for ex­am­ple. In Canada, the num­ber has roughly tripled, while in Ger­many it’s up slightly.

Nine U.S. com­pa­nies are set to go pub­lic this week, head­lined by the planned de­but of Valvo­line on Fri­day. That would make it the busiest week of the year for the U.S. IPO mar­ket.

But that’s an anom­aly in what has been a par­tic­u­larly slow year for IPOs in this coun­try, which has ac­cel­er­ated the trend of the shrink­ing stock mar­ket. Through Au­gust, only 59 IPO deals priced, ac­cord­ing to in­dus­try watcher Re­nais­sance Cap­i­tal. That was down by more than half from the pace of 2015 and the weak­est eight-month start to a year since 2009, when the econ­omy was emerg­ing from the Great Re­ces­sion.


A man leaves the head­quar­ters of Uber in San Fran­cisco. Uber makes it sim­ple for cus­tomers to hail a car, but in­vestors can’t eas­ily buy a piece of the pri­vately held com­pany, which is val­ued at more than $60 bil­lion.

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