Charts of the day: Creative destruction in the S&P500 index

Wednesday, January 29, 2014

Charts of the day: Creative destruction in the S&P500 index

Mark J. Perry | January 26, 2014, 10:10 pm

image001-7image002-2A 2012 article by Richard Foster (“Creative Destruction Whips through Corporate America“) provides a great example of “creative destruction” in the US economy and stock market – the accelerating turnover in the S&P500 Index based on almost 100 years of data. Here are some key findings:

1. US corporations in the S&P500 in 1958 remained in the index for an average of 61 years.  By 1980, the average tenure of an S&P500 firm was 25 years, and by 2011 that average shortened to 18 years based on seven year rolling averages. In other words, the churn rate of companies in the S&P500 has been accelerating over time (see top chart above, and examples of the S&P500 churn in the bottom chart).

2. On average, an S&P 500 company is now being replaced about once every two weeks.

3. At the current churn rate, 75% of the S&P 500 firms in 2011 will be replaced by new firms entering the S&P500 in 2027.

4. In 2011, a total of 23 companies were removed from the S&P500, either due to declines in market value (for instance, Radio Shack’s stock no longer qualified as of June) or through an acquisition (for instance, National Semiconductor was bought by Texas Instruments in September).

And here’s Foster’s conclusion:

As we head into a time of stronger growth coupled with increase technological change, the message for senior executives is clear: if you aim to maintain control of your corporation and deliver value to shareholders and customers, you must embrace creative destruction rather than wait to become a victim of this unstoppable force.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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