Visualizing The World’s Largest Sovereign Wealth Funds

A Visual Guide to Stock Splits

Imagine a shop window containing large pieces of cheese.

If the value of that cheese rises over time, the price may move beyond what the majority of people are willing to pay. This presents a problem as the store wants to continue selling cheese, and people still want to eat it.

The obvious solution is to divide the cheese into smaller pieces. That way, more people can once again afford to buy portions of it, and those who want more can simply buy more of the smaller pieces.

The total volume of the cheese is still worth the same amount, it’s only the portion size that changed. As the infographic above by StocksToTrade demonstrates, the same concept applies to stock splits.

Like wheels of cheese, stocks can be split a number of different ways. Some of the more common splits are 2-for-1, 3-for-1, and 3-for-2. Less common splits can take place as well, such as when Apple increased its outstanding shares by a 7-to-1 ratio in 2014.

Why Companies Do Stock Splits

Of course, stocks aren’t cheese.

The real world of the financial markets, driven by macro trends and animal spirits, is more complex than items in a shop window.

If companies want their stock price to continue rising, why would they want to split it, effectively lowering the price? Here are a some specific reasons why:

1. Liquidity
As our cheese example illustrated, stocks can sometimes see price appreciation to the point where they are no longer accessible to a wide range of investors. Splitting the stock (i.e. making an individual share cheaper) is an effective way of increasing the total number of investors who can purchase shares.

2. Sending a Message
In many cases, announcing a stock split is a harbinger of prosperity for a company. Nasdaq found that companies that split their stock outperformed the market. This is likely due to investor excitement and the fact that companies often split their stock as they approach periods of growth.

3. Reducing Capital Costs
Stocks with prices that are too high have spreads that are wider than similar stocks. When spreads—the difference between the bid and offer—are too large, they eats into investor returns.

4. Meeting Index Criteria
There are specific instances when a company may want to adjust its share price to meet certain index requirements.

One example is the Dow Jones Industrial Average (DJIA), the well-known 30-stock benchmark. The Dow is considered a price-weighted index, which means that the higher a company’s stock price, the more weight and influence it has within the index. Shortly after Apple conducted its 7-to-1 stock split in 2014, dropping the share price from about $650 to $90, the company was added to the DJIA.

On the flip side, a company might decide to pursue a reverse stock split. This takes the existing amount of shares held by investors and replaces them with fewer shares at a higher price. Aside from the general stigma associated with a lower share price, companies need to keep the price above a certain threshold or face the possibility of being delisted from an exchange.

Stock Splits Happen, but are not Inevitable

Alphabet will become the most recent high profile company to split their stock in early 2022. The company’s 20-for-1 stock split aims to make the share price more accessible to retail investors dropping the price from approximately $2,750 to $140 per share.

Conversely, Berkshire Hathaway has famously never split its stock. As a result, a single share of BRK.A is worth over $470,000. Berkshire Hathaway’s legendary founder, Warren Buffett, reasons that splitting the stock would run counter to his buy-and-hold investment philosophy.

Fact Check: The Truth Behind 5 ESG Myths

In 2021, investors continue to embrace environmental, social, and governance (ESG) investments at record levels.

In the first quarter of 2021, global ESG fund inflows outpaced the last four consecutive quarters, reaching $2 trillion. But while ESG gains rapid momentum, the CFA Institute shows that 33% of professional investors surveyed feel they have insufficient knowledge for considering ESG issues.

To help investors understand this growing trend, this infographic from MSCI helps provide a fact check on five common ESG myths.

1. “ESG Comes at the Expense of Investment Performance”

Fact Check: Not necessarily

Worldwide, ESG-focused companies have not only seen higher returns, but stronger earnings growth and dividends.

Source: MSCI ESG Research LLC (Dec, 2020)
*Contribution of earnings growth and dividends/buybacks to active return
**Active return is the additional gain or loss compared to it respective benchmark

In fact, a separate study from the CFA Institute shows that 35% of investment professionals invest in ESG to improve their financial returns.

2. “Investors Talk About ESG But Don’t Invest In It”

Fact Check: False

Global ESG assets under management (AUM) in ETFs have grown from $6 billion in 2015 to $150 billion in 2020. In just five years, ESG AUM have accelerated 25 times.

Today, money managers are focusing on the following top five issues:

Source: US SIF Foundation (Nov, 2020)

Meanwhile, over 1,500 shareholder resolutions focused on ESG-related matters were filed between 2018-2020. Not only are investors turning to ESG assets, but they are placing higher demands on corporate responsibility.

3. “ESG Investment Strategies Eliminate Entire Sectors”

Fact Check: Not necessarily

First, not all ESG investment approaches are exclusionary.

For instance, in North America roughly 51% of ESG ETFs used an ESG integration approach as of Dec. 31, 2020. In an ESG integration approach, ESG risks and opportunities are analyzed with the goal to support long-term returns.

By comparison, values and screens approaches, which accounted for over 22% of ESG ETFs in North America may screen out specific business activities, such as alcohol or tobacco, or sectors such as oil & gas.

Source: Refinitiv/Lipper and MSCI ESG Research LLC as of Dec 31, 2020 (MSCI Feb, 2021)

Second, companies are assessed on a sector-specific basis where ESG leaders and laggards are identified within each sector in comparison to peers. In other words, ESG doesn’t mean eliminating exposure to entire sectors. Instead, investors can choose from a range of companies based on their ESG ratings quality.

4. “ESG Investing Is Only For Millennials”

Fact Check: False

Although ESG is popular among millennials, ESG investing is being driven by the entire investor population. In 2019, one study finds that 85% of the general population expressed interest in ESG investing.

Source: US SIF Foundation (Nov, 2020)

Sustainable investing goes far beyond millennials—ESG disclosures are quickly becoming requirements for key industry participants, such as institutional investors and listed companies.

5. “ESG Investing is Here to Stay”

Fact Check: True

Climbing 28% in 2020 alone, over 3,000 signatories have committed to the UN Principles of Responsible Investment. As of the first quarter of 2021, 313 global organizations and 33 asset owners have been newly added.

Source: UN PRI
*As of Mar, 2020

Central to ESG’s growth is the availability of ESG investments. ESG investing has become more widely accessible—which wasn’t always the case. Over the last decade, the global number of ESG ETFs has grown from 46 to 497.

Why the Facts Matter

As ESG investments continue to play an even greater role in investor portfolios, it’s important to focus on data rather than prevailing ESG myths that are not backed by fact.

Given the recent momentum in investment returns and ESG adoption, data-driven evidence empowers investors to build more sustainable portfolios that better align with their investment objectives.