Bloomberg Businessweek

 FINANCE Bloomberg Businessweek March 11, 2019

21

prevailed in markets for about five years, which
is usually ascribed to central banks’ efforts to
support steady growth after the financial cri-
sis. The tie between old age and low volatility is
unproven, but theorists such as Stulz say research
exploring the connection is warranted. “When
you think of volatility, there are two pieces to
it,” he says. There’s certainly plenty of systemic,
or marketwide, turbulence out there. That’s a
function of lots of different companies moving
in unison—say, when there’s news about trade
tensions between the U.S. and China. But then
there’s what’s known as idiosyncratic volatility, or
the ups and downs that are particular to just one
company. It’s become rarer for the average volatil-
ity of individual stocks in any given year to exceed
30 percent, Bloomberg data show. From 1990 to
2003, that level generally defined the bottom of
the range. “Firms that are older and larger have
much less idiosyncratic volatility,” Stulz says.
Conglomeration may be contributing to the
decline in volatility, as companies behave more
like indexes of multiple stocks. Amazon.com Inc.
isn’t just an online marketplace—it’s also a gro-
cery chain, a cloud-services company, and a media
powerhouse. Walmart Inc. owns multiple brands,
and Google parent Alphabet Inc. is way more than
a search engine. “You have a bunch of individual
companies, each have their expected return, each
have their own volatility,” says Joe Mallen, chief
investment officer at Helios Quantitative Research.
“What happens when you aggregate those into one
company? The expected return becomes the average
of all of the parts, but the volatility decreases. You’re
just building a portfolio.”
If you were trying to design a buyer optimized for
today’s lumbering giants, you would come up with
index-tracking products such as exchange-traded
funds. According to some analysts, it’s no surprise
that as the number of companies shrank, the num-
ber of ETFs ballooned. What started in 1993 with

SPY, the ETF that tracks the S&P 500, has grown into

an almost $4 trillion industry. Many retail and insti-

tutional investors just aren’t that interested in indi-

vidual companies. Trading in ETFs makes up about

a quarter of total U.S. trading volume each day, and

some days that share can jump to 40 percent.

When people are focused on trading in and

out of markets, not specific stocks, and when

young companies are going through their growth

mode outside of public markets, “it does change

things from a volatility perspective,” says Yousef

Abbasi, director of U.S. institutional equities and

global market strategist at INTL FCStone. It doesn’t

necessarily make investing overall less risky—index

ETFs fall hard when people get worried about the

market writ large—but it may be making individual

stockpicking more of a snooze. —Sarah Ponczek and

Reade Pickert

○ The private equity firm has a surprising model

for the giant credit business it’s putting together

It’sNotaBank,

It’sApollo

THE BOTTOM LINE It’s easy now to buy a portfolio of established,

sturdy public companies. But with many firms staying private,

investors may be missing out on important parts of the economy.

Jim Zelter says he wants to build the GE Capital

of tomorrow.

You read that right. General Electric Co.’s

finance arm almost brought GE down. But Zelter’s

firm, Apollo Global Management LLC, is slowly

picking off pieces of it. Apollo has bought billions

of dollars of investments once managed by GE

DATA: KATHLEEN KAHLE, UNIVERSITY OF ARIZONA; DEALOGIC; BLOOMBERG

The U.S. Market Ages and Shrinks

1990 2017

20

10

0

Average age of a
U.S.-listed stock

Companies listed

on U.S. exchanges

U.S.-listed initial

public offerings

Average 1-year volatility

of stocks in the S&P 500

3/31/90 12/31/18

60%

40

20

1990 2018

800

400

0

1990 2015

8k

4

0