The Wilshire 5000 Total Market Index is a widely used benchmark for the US equity market. You might guess that the Index is made up of 5,000 stocks but it actually contained only around 3,600 companies, as at December 31, 2016. The last time this index contained 5,000 or more companies was at the end of 2005.
This mirrors the overall trend in the US stock market, which accounts for around half of the world’s total stock market capitalisation. 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? We believe not. When looked at globally, the number of publicly listed companies has not declined. The number of companies listed globally has increased from about 23,000 in 1995 to 33,000 at the end of 2016. This is substantially larger than what many investors consider to be an investable universe of stocks. The MSCI All Country World Index Investable Market Index (MSCI ACWI IMI) contains between 8,000 and 9,000 stocks.
While it is true that in the US there are fewer publicly listed companies today than there were in the mid-1990s (a decrease of about 2,500), the increase in listings both in developed markets outside the US and in emerging markets has more than offset the decline in US listings. For investors looking to build diversified investment portfolios, the implications of the trend in listings are 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 over-concentration in any one country. By having a truly global investment approach, investors have the opportunity to capture returns wherever they occur.