(James Saft is a Reuters columnist. The opinions expressed are his own)
By James Saft
March 9 (Reuters) - While the financial industry makes good money selling what is new, like IPOs, investors themselves very likely do better by sticking with the old: old companies, that is.
In an age of technological wonders and unicorn valuations for companies with little or no profit, investors can easily fall into the trap of over-weighting new and buzzy companies and sectors.
The data tell a different story, with older companies actually outperforming the young, and really old ones, like a century or more old, doing exceptionally well.
U.S. initial offerings in 2015 were a bit of a bust, generating an overall loss of 2.1 percent for the year, with 57 percent of issues ending the year lower than their debut price, according to Renaissance Capital data. And 2015 was not an aberration: earlier studies have shown that newly listed companies have underperformed the broader market in more than seven in 10 years since the early 1980s.
Contrast this to the performance of very elderly companies, which Credit Suisse called ‘centenaries’ in a recent study. Credit Suisse constructed a global index of 100-year-old-plus companies in historically stable industries like food, utilities and transportation and found quite strong results:
“Although historical share price performance statistics are no guarantee of future performance, we find it interesting that the ‘centenaries’ have an exceptionally strong track record. These ‘old’ companies have outperformed global equities by circa 500 bps annually since 2005 and by almost 300 bps during the past 12 months,” Credit Suisse analysts Eugene Klerk, Richard Kersley and Brandon Vair wrote in a client note.
The New York Stock Exchange’s Century Index, comprised of $1 billion-plus capitalization U.S. companies which are at least 100 years old, has also done well, outperforming the Dow Jones Industrial Average since its inception in May 2012 and, back tested, also outperforming major indices going back to 2000.
To be sure, the underlying causes of this outperformance of the aged are hard to know with certainty, much less if they will persist. Yet one thing stands out, unlike IPOs or the kind of recently hot companies which are forever being featured on financial television, old companies are not really sold aggressively to investors.
That’s in part because they often, being utilities or breweries or train companies, don’t have an exciting new story. It is also because old companies aren’t money machines for Wall Street in the same way that new ones are. They simply require less investment banking. That leads, perhaps, to an imbalance of coverage tilted towards hot new sectors, and maybe even a bit more optimism about them in that coverage than is warranted.
Writing on behalf of Credit Suisse a year ago, Elroy Dimson, Paul Marsh and Mike Staunton of the London Business School observed the positive effect seen among ‘seasoned’ British companies as compared to their junior peers.
If you define seasoning as time elapsed from IPO, the older the company, the better it does. Looking at British stocks 1980-2014, companies with 20 years’ seasoning returned 61 pounds for every pound invested at the start. Companies with eight to 20 years’ seasoning returned 49 pounds, those with four to seven years under their belts only 33 and those with three or less just 20.
This is striking in that it covers a period in which not just the British but the global economy has been revolutionized by technological change. How it could be that most of that benefit would go to frankly geriatric companies is hard to fathom.
Surely there is an element of over-enthusiasm among investors for the new new thing, leading them to overpay, and as in 1999 and 2000, fuel a bubble.
It is also true that much of the economic benefit of a technological revolution does not flow to those who, at first glance, appear to be the winners. Take the development of the Erie Canal, which for a brief time after it opened in 1825 revolutionized transport in the U.S. Not only was the canal quickly made redundant by a newer technology, railroads, but even the early winners of its impact didn’t have much time to enjoy its effect.
Shortly after the canal opened, farmland in Ohio boomed in price as grain could suddenly be much more cheaply transported to markets on the East Coast and in Europe. No sooner did Ohio farmers count their gains than huge new supply flowed in from farms further west, which were only economic now that transport was cheaper. Grain prices fell and investors in Ohio farmland were hurt and many ruined.
Contrast this to Tiffany & Co, founded in 1830 and delivering double the performance of the S&P 500 over the past decade.
It may be that the very old got that way for a reason. (At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. You can email him at email@example.com and find more columns at blogs.reuters.com/james-saft) (Editing by James Dalgleish)