Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 265

Winner-takes-all is turning conventional wisdom on its head

Video transcript

The Wilshire 5000 Index was introduced in the mid-70s, and at that time, shouldn't be too terribly shocking, there were about 5,000 publicly traded companies in the United States. Over the course of the next 20 years, that number rose to about 7,500. Interestingly, over the last 20 years, that number has declined and it's now at about 3,500. There are a lot fewer publicly traded companies in the United States.

In fact, these large companies are taking a larger and larger part of the playing field for each particular sector. This is a little bit strange. It's not happening that much in other countries. We basically have a publicly traded company deficit in the United States. The bottom line is, there are fewer and fewer companies that are taking the playing field, and therefore, these companies tend to be larger companies. They're older companies. They're companies that we know. It becomes more and more difficult for small and new companies to enter the playing field.

Historically, those small and new companies tend to be the ones that are innovative. They're the ones that push the envelope. They're the ones that force the incumbents to have to be more innovative, more creative, more competitive. When we take those smaller and newer companies off the field, it should be a bad thing for the economy. It should mean less innovation. It should mean less job growth. We should be a little bit worried about that.

The other thing that's really interesting about this dynamic is the textbooks would tell us, as there are fewer and fewer companies in any given sector, and you get sort of an oligopolistic outcome, few companies that control their space, prices should go higher and consumer welfare should fall. But what we're actually seeing, and especially in some of the digital spaces, is that these companies are competing on price. So, prices are actually falling and consumers are better off because prices are lower.

So, why should we care? Why is this a problem? Well, it could be a problem, again, because we're not seeing the kind of competition that we would want to see. We're not getting the innovation. We're not seeing the new job growth from smaller companies, but let's abstract from that for a minute and ask, what does it mean in terms of markets? What does it mean in terms of finance?

Well, about 25 years ago there was a really important paper that came out from Fama and French that told us that you could extract rents over the course of a business cycle by buying value companies over growth companies and buying small cap companies over large cap companies. That's worked out pretty well over the course of the last 25 years through the business cycle.

In a world, though, where winner takes all, it's the incumbent companies that tend to do better. We might want to reinspect this notion that you can extract rents from value companies and small companies over the course of long periods of time. In a world where winners take all, it might be the case that these growth companies and these large companies, the ones that we know so well, are the winners and you might want to place your bets there rather than what the conventional wisdom would tell us.

 

Erik Weisman is Chief Economist and Portfolio Manager at MFS, a sponsor of Cuffelinks. The views expressed are those of the speaker and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation to purchase any security or as a solicitation or investment advice from the Advisor.

For more articles and papers from MFS Investment Management, please click here.

  •   2 August 2018
  • 1
  •      
  •   

RELATED ARTICLES

Is there an Uber or Amazon of wealth management?

banner

Most viewed in recent weeks

Retirement income expectations hit new highs

Younger Australians think they’ll need $100k a year in retirement - nearly double what current retirees spend. Expectations are rising fast, but are they realistic or just another case of lifestyle inflation?

Four best-ever charts for every adviser and investor

In any year since 1875, if you'd invested in the ASX, turned away and come back eight years later, your average return would be 120% with no negative periods. It's just one of the must-have stats that all investors should know.

Why super returns may be heading lower

Five mega trends point to risks of a more inflation prone and lower growth environment. This, along with rich market valuations, should constrain medium term superannuation returns to around 5% per annum.

The hidden property empire of Australia’s politicians

With rising home prices and falling affordability, political leaders preach reform. But asset disclosures show many are heavily invested in property - raising doubts about whose interests housing policy really protects.

Preparing for aged care

Whether for yourself or a family member, it’s never too early to start thinking about aged care. This looks at the best ways to plan ahead, as well as the changes coming to aged care from November 1 this year.

Our experts on Jim Chalmers' super tax backdown

Labor has caved to pressure on key parts of the Division 296 tax, though also added some important nuances. Here are six experts’ views on the changes and what they mean for you.        

Latest Updates

A speech from the Prime Minister on fixing housing

“Fellow Australians, I want to address our most pressing national issue: housing. For too long, governments have tiptoed around problems from escalating prices, but for the sake of our younger generations, that stops today.”        

Taxation

Family trusts: Are they still worth it?

Family trusts remain a core structure for wealth management, but rising ATO scrutiny and complex compliance raise questions about their ongoing value. Are the benefits still worth the administrative burden?

Exchange traded products

Multiple ways to win

Both active and passive investing can work, but active investment doesn’t in the way it is practised by many fund managers and passive investing doesn’t work in the way most end investors practise it. Here’s a better way.

Economy

The Future Fund may become a 'bad bank' for problem home loans

The Future Fund says it will not be paying defined benefit pensions until at least 2033 - raising as many questions as answers. This points to an increasingly uncertain future for Australia's sovereign wealth fund.

Investment strategies

Managed accounts and the future of portfolio construction

With $233 billion under management, managed accounts are evolving into diversified, transparent, and liquid investment frameworks. The rise of ETFs and private markets marks a shift in portfolio design and discipline. 

Property

Commercial property prospects are looking up

Commercial property is seeing the same supply issues as the residential market. Given the chronic undersupply and a recent pickup in demand, it bodes well for an upturn in commercial real estate prices.

Infrastructure

Private toll roads need a shake-up

Privatised toll roads in Australia help governments avoid upfront costs but often push financial risks onto taxpayers while creating monopolies and unfair toll burdens for commuters and businesses.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.