Much has been made about the death of stock picking, in the advent of exchange-traded and passive funds that track popular equity benchmarks. But The Wall Street Journal’s veteran columnist Jason Zweig offers an alternative reason for the challenges facing money managers whose aim it is to meticulously select winning investments.
It isn’t just that active trading is doomed to failure because no active managers have demonstrated an ability to consistently and substantially outperform benchmarks like the S&P 500 index SPX, +0.16% the Dow Jones Industrial Average DJIA, -0.01% and the Nasdaq Composite Index COMP, +0.46% over time.
Zweig reports that over the past two decades more than half the U.S. listed companies have vanished, leaving less than 3,600 stocks to choose from, according to the journalist, citing a number of studies, including one from the University of Chicago’s Center for Research in Security Prices.
A combination of regulatory pain tied to costs related to being a public entity, the growth of venture capitalists and buyout firms willing to take companies out of the public eye have helped to severely winnow the universe of names.
The conclusion is that this multidecade decline has made it all the more challenging for active stock pickers, including hedge-fund highfliers, to produce so-called alpha, or returns above a benchmark.
MarketWatch’s Ryan Vlastelica has chronicled the Ice Age that stock pickers are suffering through as exchange-trade products, including ETFs, have blossomed. Cheaper fees, and better performance, and sometimes the combination of those factors, have made the job of an individual, or team of stock pickers, fraught with hearth-ache.
According to S&P Dow Jones Indices, less than 1% of U.S. equity funds that are actively managed were in top 25% of performers over five consecutive 12-month periods, when factoring for fees.
Last year, active funds saw outflows of $285.2 billion, while passive funds attracted inflows of $428.7 billion, according to Morningstar data, extending the uptrend for the passive category.
Moreover, while publicly traded stocks are seeing their ranks thinning, ETPs and ETFs are legion. Bloomberg reported in May that there are more stock-market indexes than stocks that they are intended to track.
Whether these are sustainable changes remains to be seen, but it all appears to support the case that stock picking is facing a hard slog.
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