London is becoming the Jurassic Park of stock exchanges
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The author is chair of Marshall Wace, a multi-strategy investment manager
The UK stock market is becoming a global backwater as US and Chinese markets forge ahead. It has largely failed to take part in the global rally that began in 2015.
Of course, both the US and Chinese stock markets benefit from more dynamic and expansive hinterlands, with leadership in so many of the new industries that are driving stock market performance, from fintech, renewables and mobility, to medtech, agritech and artificial intelligence. But beyond these natural advantages, the US in particular is now increasingly attracting companies from all over the world, including the UK, to list on its exchanges.
They are drawn partly by the knowledge that US policymakers can be relied upon to support the stock market. But the US equity market also boasts far higher trading volumes and far higher valuations than any of its international peers. We are reaching the point where companies may decide we should simply all agree on a single global exchange, trading 24 hours and located in New York.
The UK is not alone in falling behind. All European bourses are more or less moribund, relatively speaking. Daily volumes so far in 2021 have averaged $554bn in the US, $174bn in China and $47bn in Europe. The biggest US stocks each now trade more than the largest European markets. Apple trades $12bn per day and Tesla $21bn a day compared with the Euronext exchange at $8.1bn a day in total and the London Stock Exchange just $6.1bn.
But there are also homegrown reasons for the UK’s market decline. None is more peculiar (or farcical) than the role of income funds, the UK fund management sector’s signature dish.
These funds are a uniquely UK phenomenon. They prioritise dividends over any other kind of return from a company and therefore by definition penalise growth. There is no comparable fund management sector anywhere in the world. According to the Investment Association, of the £744bn of equity funds that comply with its criteria, some 29 per cent are in UK income or related UK all-company strategies. The IA does not have a UK growth sector and the balance of funds are mostly international.
British income fund managers believe they have a mission to protect the incomes of pensioners (an honourable objective), but this leads them to insist on companies paying out the lion’s share of their income rather than investing it back in the business. This is a form of financial decadence, discouraging capital investment and stifling growth and productivity.
Last month provided an almost perfect example of this, in the case of Scottish and Southern Energy, in which Marshall Wace’s funds have a stake of circa £130m. SSE’s first-half results were better than the market had expected and the company also committed to a rise in capital expenditure to £12.5bn by 2026, up from a previous plan to spend £7.5bn by 2025.
This included a 2.5-fold increase in investment in renewables. The increased capital expenditure would be funded partly through the sale of a minority 25 per cent stake in the networks business and partly though a reduced proportion of net income paid out as dividends.
Many analysts would expect the stock to trade up as the company doubled down on the potential of renewables. But the stock closed down 5 per cent.
Despite some of the best renewable wind resources on the planet, Britain boasts very few corporate winners in this sector. SSE was demonstrating the ambition to be one. Yet it received a decisive stock market thumbs down. Maybe income fund managers decided that SSE would not make an adequate return on its renewable investments? I don’t think so. The investment framework for renewable investments in this country is deliberately generous.
The price fall might have partly reflected SSE’s rejection of calls from Elliott Management for a break-up. But I believe the main driver of the share price fall was income managers selling down SSE because the dividend payout no longer complied with their perverse fund criteria
It is sad to watch this, just as it is sad to hear from so many growth companies how discouraged they are by the feedback they receive on many of their London roadshows.
The City of London is in danger of becoming a sort of Jurassic Park where fund managers dedicate themselves to clipping coupons rather than encouraging growth and innovation. It is time the income fund sector was phased out and replaced with funds that are more focused on growth than dividends, on the future rather than the past.
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