The FTSE 100 company, which is worth nearly £33bn, plans to seek shareholder approval to move its primary listing to the US in 2023.ĬRH said: “Our exposure to is likely to increase further driven by substantial increases in infrastructure funding, a renewed drive for the onshoring of manufacturing activity and significant levels of under-build in the residential construction market.” And so we need to turn to new alternatives, like algorithmic trading and quantitative investing.Building materials giant CRH is to move its listing from London to New York, joining a procession of businesses snubbing Britain’s stock market.
It's gotten harder to use traditional stock picking methods. This is why algorithmic trading is so important. In fact, only 0.6% of mutual funds out there can consistently produce positive alpha. Meaning that they can't consistently produce positive alpha. Of those with non-zero alpha, the remaining 24.6%, 24 of the 24.6 are unskilled. Panel A, Proportion of Unskilled and Skilled Funds, shows that 75.4% of the mutual funds out there have zero alpha. That's what the second chart below shows. The average mutual fund today not only can't beat the stock market, they actually underperform it. As we've gotten more and more mutual funds, competition is heated up, and today, as we see, alphas are actually negative.
In the early 90s, the average mutual fund out there was able to produce 50 to 100 basis points per year in excess returns, in returns over and above the stock market, for its investors. What the top chart here illustrates is that as the number of mutual funds has risen, the average alpha or the average excess return for the typical mutual fund has fallen. If you're interested, I'd recommend you go and look up the paper online sometime. To illustrate this point, I want to show you a couple of tables from a recent academic paper, False discoveries in mutual fund performance: measuring luck in estimated alphas. Algorithmic trading is a partial solution to this problem. Greater attention from investors means that it's gotten harder to pick stocks over time. Versus if you had 10,000 stocks, there will be 10,000 investors per stock. Now, if there's fewer firms out there, well, that means there's more people paying attention per stock, right? If we have, say, 100,000 investors out there, as an example, and we have 5,000 stocks today, well, that means there's 20 investors, on average, paying attention to every stock. But given all the information we have, stock prices are fair. That doesn't mean bad news can't happen in the future. All of the prices out there are fair, given what we know at a particular point in time. That would mean that there are no stocks that are undervalued and no stocks that are overvalued.
Market efficiency simply means that a stock already incorporates all known information into its price. Now, why is all this important? Well, the reality is that because there are fewer companies out there, this leads to what we call greater market efficiencies. Ever since then, there's been a slow, inexorable decline in the number of publicly traded firms, as illustrated in this graphic. The number of publicly traded firms peaked in the late 1990s at a little under 10,000. The number of publicly traded firms, over time, has shrunk. In fact, despite the fact that the US stock market continues to rise in value, the stock market has been shrinking by another metric. It's important to understand that the character and the composition of the US stock markets has been changing over the last 20 years.
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