As noted by Steven DeSanctis, equity strategist at Jefferies, the sheer number of companies listed on stock exchanges has been dropping off precipitously.
The number of firms with shares publicly listed has fallen to 3,267 from a peak of 6,364 in 1997, based on data from the Chicago Booth School of Business' The Center for Research in Security Prices. This, in fact, is the lowest number of listed stocks since 1984.
There are a number of possible reasons for this. Here's DeSanctis' breakdown:
"Between the lack of IPO activity, the pick-up of M&A, and buybacks, the US equity world is becoming smaller and smaller, and this could be one of many reasons why active managers are lagging behind their indexes. Companies may not want to come public due to the additional cost of Sarbanes-Oxley or the fact that the private market has become a bigger source of financing than it has been in the past."
Jefferies
While the answer is probably some combination of these factors, DeSanctis also thinks that the declining number of stocks may be impacting the performance of many professional stock pickers.
The argument is that with fewer and fewer companies to choose from, active managers are forced to crowd into certain stocks. Crowding makes it impossible to differentiate returns and causes these managers, in DeSanctis' mind, to fall short of their benchmarks.
It's a theory.