As high-profile businesses either abandon the UK market, bet on dual listings to access US investors who value growth, or seek private investment to avoid the regulatory costs and pressure that comes with being a listed entity, the question has come, better late than never, about what can be done to reverse the tide of a lack of investment in UK companies.
At the same time, DB pension schemes are continuing to reduce their exposure to growth assets such as equities, as they edge closer to potential buyout, resulting in total DB pension fund exposure to UK equities plummeting to 10% from 50% in 2008.
Politicians and commentators on all sides of the political spectrum are vying to present their best ideas on how to rectify the situation and attract investment into the UK, including mandating pension funds to commit a minimum investment into UK equities; removing the ISA tax break on non-UK investments; taxing passive investment vehicles and proposing various growth funds into which pension funds may or may not be instructed to allocate investment.
These suggestions have received mixed reactions. On the buy-side there is scepticism about forcing investors to commit their savings to UK growth. On the sell-side relief that politicians have finally noticed the lack of investment into the UK.
As the debate continues, and it is presumed it will continue as the current government remains distracted by the many issues consuming its tenure and as Labour positions itself to be the next business-friendly government, the issue remains: how to increase investment and risk appetite in order to increase not only investment in the UK, but also investment returns for savers, which have underperformed.
Research by JPES Partners shows that investors, including DB schemes, wealth managers and wholesale platforms, are underwhelmed by their asset managers, with a headline 36% decline in confidence in their managers and with only 25% of respondents satisfied with the delivery of investment results versus objectives.
Investment objectives and returns are a personal choice but it would be fair to assume that the majority of investors are hoping to preserve, and increase, their capital whilst minimising volatility, albeit accepting that it forms part of an investment timeline. Another key consideration is of course cost, which has led to the rise of trackers and passive investing.
It is perhaps this trend towards passive investing, combined with increasing regulation and cost, that has had the greatest impact on returns and investing. As Simon French, Economist at Panmure Gordon wrote in The Times, “These investments…contribute next to nothing to the key social function of financial markets…” Many passive vehicles route capital and investment away from the smallest and fastest-growing companies in favour of the biggest. They also encourage a lack of diversification. Take the FTSE 100 as a case in point where investors’ exposure will be dominated by banks and natural resources, or the US Nasdaq where investors will end up long technology. In the end, it drives more money to certain corners of the market; it doesn’t support growth of new or growing businesses, only of those that have, in effect, already made it.
The desire to re-route capital to nascent or growing parts of the economy and to create a liquid market to encourage growth is surely a good thing for all market participants – to encourage economic growth and all the benefits that brings with it – and to precipitate a growth in investments for savers. No-one is suggesting allocating all pension pots to growth or dismissing the role of trackers – but the current downward trend is bad for the UK economy, UK plc and UK savers.