How the incredible shrinking stock market affects your fund

NEW YORK — More companies don’t want you, or any other investor, to buy their stock.

Instead of listing their shares on a stock exchange, businesses are going private or never going public in the first place. Security company ADT, for example, pulled its shares off the market this spring after going private in a nearly $7 billion buyout.

Uber, meanwhile, makes it simple for customers to hail a car, but investors can’t easily buy a piece of the privately held company, which is valued at more than $60 billion.

The number of publicly traded U.S. stocks has been on the decline since the dot-com bust, and there are now only about 3,300 listed in the Center for Research in Security Prices’ database. That’s down by roughly half since the late ’90s, and it’s the lowest number since 1984, when the U.S. population was about three-quarters the size it is today.

For companies, going or staying private means they can more easily ignore the whims of Wall Street analysts and short-term traders who focus on this quarter’s numbers rather than long-term growth. Companies may also be feeling less inclined to sell their stock in an initial public offering when they can instead raise cash cheaply by borrowing at close to record-low interest rates.

But while the trend may be good for CEOs, it’s also limiting the menu of choices available to investors and to the mutual-fund managers they hire.

“The U.S. equity world is becoming smaller and smaller, and this could be one of many reasons why active managers are lagging behind their indexes,” Steven DeSanctis, an equity strategist at Jefferies, wrote in a recent report.

With fewer companies to choose from, it’s becoming more difficult for fund managers to differentiate their portfolios from others and to justify the fees they charge. Not only are fewer companies publicly traded, but many of the companies that still list on exchanges have fewer shares available to trade than before.

With billions of dollars in the bank and the cost of borrowing close to record lows, companies have been on a buyback binge in recent years.

They’re repurchasing their shares to eliminate them, which gives their per-share earnings a boost at a time when the global economy is still growing only slowly.

Fund managers have been complaining for years that big stimulus programs by central banks around the world have caused stocks to increasingly move together in herds, both up and down, which dilutes the rewards for picking stocks.

The more limited menu of options means fund managers are increasingly chasing after the same opportunities.

So perhaps it shouldn’t be a surprise that few are able to distinguish themselves. There are more than 2,000 mutual funds focusing on U.S. stocks alone, according to Morningstar.

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