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Going Global: A Look at Public Company Listings

Written by Gerald E Gasber, CFP®, CIMA®, CPFA & Diminsonal Fund Advisors LP.

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. 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. 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.

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.

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.

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.

Who's On Your Side?

Written by Bob Veres & Gerald E Gasber, CFP®, CIMA®, CPFA.

Friday, June 9 quietly marked/will mark an historic day in the financial services world. On that date, all financial advisors will be required to forego any sales agenda and give advice that would benefit their clients or customers—or, if they decide otherwise, to explain how and why they intend to give advice that instead primarily benefits themselves and their brokerage company. This rule only pertains to rollovers from a qualified plan like a 401(k) into an IRA, and to the investment recommendations for that IRA account. But it may be a first step toward something larger.

The polls consistently show that most Americans believe they already receive objective advice—called "fiduciary" advice by the profession and regulators. But the overwhelming odds are that they don't. There are half a million brokers who earn commissions if they can convince you to buy an expensive alternative to the thriftier, better-performing investment options on the market. That's more than ten times the number of advisors who adhere to a fiduciary standard. Government research estimates that consumers lost $17 billion a year to conflicted advice in the recommendations made by brokers and sales agents posing as advisors related to retirement plans. This, to put it bluntly, helps explain why so many Wall Street brokers are insulted if their annual bonus is in the low seven figures.

The actual number of real fiduciary advisors may actually be lower than this discouraging figure. A mystery shopper study in the Boston area found that only 2.4% of the "advisors" (most were almost certainly brokers) it surveyed made what most would consider to be fiduciary recommendations. On the other side, 85% advocated switching out of a thrifty portfolio with excellent funds into something a bit more self-serving.

An article in the most broker-friendly publication imaginable—Bloomberg—recently outlined some of the ways that you can be taken in by a sales pitch and never know it. (The full article can be found here: https://www.bloomberg.com/news/features/2017-06-07/fiduciary-rule-fight-brews-while-bad-financial-advisers-multiply. It notes that the brokerage industry—that is, the larger Wall Street firms, independent broker-dealer organizations and life insurance organizations—repeatedly fought the fiduciary rule in court, arguing, in some cases, that their brokers and insurance agents shouldn't be held to this standard because, despite what they said or what the companies' marketing materials proclaimed, they were nothing more than salespeople trying to effect a sale. The courts refused to block the rule.

It gets worse. Even though brokers are held to a sales standard—they are required to "know their customer" and to make investment recommendations that would be "suitable" to somebody in your circumstances (a very low standard that is appropriately known as "compliance"), a new study found that 8% of all brokers have a record of serious misconduct, and nearly half of those were kept on at their firms even after getting caught.

We don't know how long this regulation will be in effect. New Labor Secretary Alexander Acosta has announced that he's studying whether the rule that requires brokers to act in the best interests of their customers is good or bad for customers, and his comments hint that he thinks you would be harmed if suddenly you were able to trust the advice you receive. But there is one simple way to determine whether you're working with somebody you can trust.

First, ask your advisor directly to provide written documentation that he or she will act in your best interests. This should be no longer than a page and might be no longer than a sentence or two. There's even a "Fiduciary Oath" that many financial advisors are giving to their clients—without any prompting. If the broker hems and haws, then hold onto your wallet or purse, because chances are any recommendations you receive are going to cost you money that will be disclosed in the fine print of whatever agreement you sign, somewhere after page 79.

Sources:

https://www.bloomberg.com/news/features/2017-06-07/fiduciary-rule-fight-brews-while-bad-financial-advisers-multiply

http://www.dolfiduciaryrule.com/

http://www.newhampshire.com/article/20170604/NEWHAMPSHIRE02/170609837/1037

 

Where to Find Happy People

Written by Bob Veres & Gerald E Gasber, CFP®, CIMA®, QPFC.

The World Happiness Report is out, and a group of independent experts have now compiled surveys of people in 156 countries, asking them to evaluate their lives on a scale of 1-10. They then looked at some of the factors that seem to contribute to happiness, and identified five: real GDP per capita (a measure of average wealth); healthy life expectancy at birth; freedom to make life choices; generosity; and whether or not they perceived their society to have elements of corruption.

Number One on the list is Norway, and you might see a certain pattern when you see the runners-up: 2) Denmark, 3) Iceland, 4) Switzerland, 5) Finland, 6) The Netherlands and 7) Canada. Sweden comes in at number 10, rounding out the socialistic Nordic societies. In between are 8) New Zealand and 9) Australia.

Where does the U.S. rank? Number 14, behind Israel (11), Costa Rica (12) and Austria (13). The U.S. ranked poorly in social support and, interestingly, mental illness. America's ranking was as high as third in 2007, when people were less likely to cite corruption as a part of their lives.

Where are people least happy? Most African countries reported low levels of happiness. And, interestingly, the people in China report being no happier today than they were 25 years ago, despite rapidly-growing per capita income. Chinese respondents to the survey attribute their lagging happiness to rising unemployment and a poor social safety net for the less fortunate.

Sources:

http://worldhappiness.report/ed/2017/

http://www.inc.com/business-insider/21-happiest-countries-world-2017.html?cid=sf01001&sr_share=twitter

 

What a Market Top Looks Like

Written by Bob Veres & Gerald E Gasber, CFP®, CIMA®, QPFC.

The current bull market in stocks will reach its 8th anniversary tomorrow, and for about the last four years, professional investors and financial planners have been scratching their heads. The markets have gone up and up and up, and we all know that they won't go up forever, which means there's a correction looming somewhere on the horizon.

The problem is that the wisest professionals generally know what a market top looks like—in hindsight. For most of the last eight years, investors have been constantly looking over their shoulders, waiting for the next shoe to fall, being very cautious about their stock allocations. As long as that generalized anxiety persisted, it was unlikely that we would see the exuberance and overconfidence that typically precedes a major market decline.

The markets generally top out when the average person starts feeling like he or she is missing out on future returns. Suddenly money that has been on the sidelines for years starts to flow back into the market, causing it to rise faster than it ever did during the early years of a bull market. You start to see pundits, touts and market prognosticators get really enthusiastic. Nobody could see any sign of that swell of overconfidence—

Until now, with what Wall Street has been calling The Trump Trade. The trade means that people everywhere are investing in anticipation of lower corporate taxes and fewer regulations.

An excellent description of how to spot a market top was published on the MarketWatch website, entitled "7 Signs We're Near a Market Top, and What to Do Now."

What are the signs? The first one is when you see retail investors start pouring money into stock mutual funds, in fear of missing out on another year of growth. Second: the survey of professional investors starts showing a low proportion of bears to bulls, basically meaning that the bear market prognosticators (and there are some who nearly ALWAYS predict one) start to give in.

Third, market sentiment indicators like the VIX index (that tells us what traders think of future market volatility) start to look complacent. Fourth: you see record price/earnings ratios, which means people are ignoring value and simply expecting future growth. Fifth: investors are finally starting to forget the last market crash, and have stopped looking over their shoulders. Sixth, the article says that the Nasdaq index of mainly tech stocks will begin a bull run. And seventh, investors reach a tipping point where greed outweighs fear. Instead of fearing a market pullback, they fear missing out.

Does any of this look familiar when you look at today's markets?

To many professional investors, the signs are everywhere that the investment markets have finally reached those last heady stages of a bull market, when prices begin to soar faster than they ever did in the runup. You can't expect a major, painful bear market until those conditions have been met, and we're finally meeting them now. You're going to hear that earnings per share for American corporations have been beating expectations in the latest quarter.

With all this wisdom and insight, what's the best course of action? Trying to time the market is never a good strategy. Even though valuations are high right now, there is no good reason, with all the euphoria, that they won't keep going higher. And the euphoria could last days, weeks, months... or years. If you get out now, there's a good chance you'll miss the most exciting part of the bull market.

More importantly, if you get off of the roller coaster and do manage to miss the next dip, how will you know when to get back in again? Bear markets have a habit of suddenly reversing themselves, and it's possible that by the time you feel confident that the market is finally on an upswing, you'll be buying at prices higher than what you sold for.

A better possibility is to quietly start to raise the cash allocation in your portfolio, with the idea that when the bear market finally does manifest, you'll have money to invest at bargain prices. This isn't for the faint-hearted, however, since it's tough to miss the last stage of a roaring bull, and even tougher to re-invest when everybody else is selling out.

A safer way to weather the storm is to simply hang onto the restraining bar in your roller coaster seat and endure the bumpiest part of the ride. If you believe that stocks will eventually recover, as they always have in the past, then eventually you'll be looking at gains again while a lot of your friends and neighbors will have sold near the bottom in the last stages of a bear market capitulation.

Most importantly, you should recognize that the best, most seasoned market watchers can and will be way off on their timing. You can't rely on anyone to know the future. That MarketWatch article that talked about the seven signs of a market top? It advised people to start edging out of the market as soon as possible, because the red flags, it said, were everywhere.

And it was published in March, 2014.

Sources:

http://www.marketwatch.com/story/7-signs-were-near-a-market-top-and-what-to-do-now-2014-03-07

http://www.marketwatch.com/story/why-the-end-of-the-earnings-recession-doesnt-guarantee-stock-market-gains-2017-03-08

Get Ready for Weird Food

Written by Bob Veres & Gerald E Gasber, CFP®, CIMA®, QPFC.

Are you ready to start eating bugs? Or or goldfish muscle dipped in fetal bovine serum? Scientists point out that people 100 years ago probably would have barfed at the sight of a Twinkie and would have had trouble comprehending a Dorito. So, looking ahead 100 years, they're predicting that the food people typically consume will get weird in ways that are surprisingly predictable.

For example? Consider insects in your diet. You can already buy pasta and food bars made with cricket flour that adds extra protein, and roasted crickets are sold whole at the website www.bonanza.com. Grasshoppers are equally nutritious, and mealworms and black soldier flies are, we are told, a great source of dietary fat. There's some debate about whether eating insects is more environmentally-conscious than eating chicken or beef, but reports suggest that the insects can survive on diets that you wouldn't feed to your pig.

What about hamburger that is made in the laboratory? Companies like Memphis Meat and Mosa Meat are patterning stem cells into animal tissue, which can be converted into synthetic meat that looks like ground beef. The process uses 7-45% less energy than raising animals for slaughter, and produces 78-96% fewer greenhouse gas emissions—and, as you might guess, it involves 99% less land use than conventionally produced steak. Along the same lines, NASA researchers created fish fillets by dipping goldfish muscle into fetal bovine serum, while New Wave Foods is looking for ways to create synthetic shrimp out of red algae.

Farmed fish are already part of our diet, and history suggests that it will totally take over the fish market. Raising cattle takes up a lot of land, but raising cultivated fish as livestock takes place where people don't live (in the ocean), and fish require only a fraction of the amount of feed that cattle do in order to produce the same amount of protein. In case you think this is far-fetched, the former director of Aquaculture at WorldFish Corp. says that most aquatic food now comes from farming rather than fishing. That shouldn't be surprising, since virtually all the beef, pork and chicken we consume now comes from farmed animals, rather than hunted ones.

You already eat vegetables and other plant life. Why not micro-algae as well? The microscopic plants feed off carbon dioxide in the atmosphere, and are rich in proteins, fats and carbohydrates—including a high concentration of omega 3 fatty acids.

Not ready for the brave new world of exotic (and disgusting) foods? Don't worry; over time, your kids or grandkids will eat these future delicacies with the same nonchalance that you now give to Doritos and Twinkies.

Source:

http://gizmodo.com/eight-futuristic-foods-youll-be-eating-in-30-years-1790570240