Asset Allocation and the Wonders of Mixed Messages
Depending on how we as investors consume data and news, there is a lot of noise out there about how different investors allocate their money. Case in point, Short Squeez, a blog we read daily, posted a story recently about Sovereign Wealth Funds being over-allocated to private equity and putting a lot more scrutiny on their current investments because of it. What we found funny about this was that the day before, they had posted the chart below that they sourced from Apollo:
Significant Decline in the Number of Publicly Traded Companies
The numbers are pretty small, so we’ll highlight that the number of publicly traded companies in the United States has declined from more than 8,000 in 1996, to fewer than 4,500 today. To that, we will also add that by the Federal Reserve’s count, 11.5% of listed public companies are what they call “Zombie Companies” or companies that earn less than they owe in interest costs. If we pull those companies off this list, there are now fewer than 4,000 investable public companies in the US and declining.
In writing Wind in the Willows, we may have beaten this idea to a pulp, but the benefits of adding allocations to private equity and real estate have long been shown to add return while reducing risk in a portfolio. If you want to know more about that, please call and we’ll walk you through that (we love talking about it). But this concept is one that Sovereign Wealth Funds, College Endowments, and many other institutional investors have known for years. Furthermore, in recent years, we have been hearing quite a lot about how narrow leadership in public market performance has been over the last several years. These discussions usually surround a catchy phrase like “The Nifty Fifty”, “FAANG Stocks”, “FAANGM”, or the current iteration… ”The Magnificent Seven”. The narrowing of public company participation in large portfolios goes well beyond these catch phrases, and the chart above is perhaps the best proof we could ever ask for.
For most of us, what all this boils down to is that investment markets change all the time. We are in the midst of a material shift from public companies to private investments. This has largely been driven by regulators forcing regulatory and compliance costs materially higher for public companies over the years.
Are we looking at a situation where large investors are over-allocated? Are we looking at a secular change away from public markets? Or are we just seeing this year’s iteration of the constantly evolving investment landscape? We’ll bet on the latter.
Over Allocated to PE?
Public Companies Narrow Focus and the Rise of PE Allocations
Zombie Public Companies