We live in a world of mega companies and mega deals, where a small number of companies account for a big chunk of the market’s value, most of its earnings and its payouts. Numbers of listed companies are falling here and in the US, in large part as a result of acquisitions. There is nothing wrong with being big as the success of Apple, Alphabet and Amazon all testify to. And while no one can accuse this bunch of losing their way and failing to focus on their products rather than the financials, all too often that is the case with older, bigger companies where management’s focus drifts towards financials rather than products or service, and the easiest path to growth is to buy it in.
Recent research on US companies confirms that they are getting older, reflecting a lack of new companies coming through. That wouldn’t matter but evidence suggests older companies innovate less and are more rigid. US companies now have far more cash than debt – not the sign of businesses that are going places, and they are investing far less than they used to. At the same time, total payouts to US shareholders are at record levels, a statistic that underlines how companies are using their cash in an unproductive way.
When Professor John Kay wrote a report on short termism in the UK stock market, he pointed out that at the start of the 1990s the two largest industrial companies in the UK were ICI and GEC, neither of which now exists. He blamed their downfalls on excessive focusing on financial targets and aggressive programmes of acquisitions and disposals which meant they traded in businesses “rather than chemicals or electrical goods” – not a mistake that was made by their German counterparts BASF and Siemens, “the leading chemical and engineering companies in the world”.
Having too many stodgy oldies risks making your portfolio a very dull boy, so if stock markets are changing then investor strategies need to too. This is where private equity funds come in. This sector, uninhibited by short termism and fuelled by debt, offers the chance of dynamic, long-term growth that’s so hard to find in the stifling environment of the main market, itself a reason why many young companies are shunning the stock market. It’s why Scottish Mortgage Investment Trust doubled its exposure to unquoteds, why its manager has warned that many of the world’s largest listed companies face doom and why Neil Woodford launched his Patient Capital fund.
