James Ashton, chief executive of the Quoted Companies Alliance, says that if we want international investors to back UK companies, then we need to lead the way.
Backing: James Ashton says we need to support UK listed companies big and small
The several hundred international investors that will assemble in the City of London’s on Monday have a good idea of what to expect.
At the Government’s investment summit there must be a nod to the UK’s illustrious, industrious past, a showcase of promising sectors that could power a high-tech, high-growth economy – and a polite request to help fund them.
You might think it would not be a hard conversation. After all, the UK has much to attract smart financiers: advances in drug discovery, green energy, computing and more.
Ideas from every sector that spill from university campuses to be incubated in exciting start-ups that are the envy of the world.
And compared to the political and economic uncertainty elsewhere, these shores look like a stable bet – as long as there is a concerted effort to build new infrastructure, plus dispel the recent doom and gloom about our prospects.
But what any international investor might reasonably ask before inking a multi-billion pound commitment to the UK is: if this is such a great place to put money to work, why don’t you back yourselves more?
It’s true. UK pension funds that a generation ago assigned more than half of their assets to UK equities now allocate a measly 4.4 per cent. The proportion is among the lowest of any developed pension system, according to think tank New Financial’s findings.
Defenders of the long-term shift into bonds point to turn-of-the-century accounting changes that spurred less risk-taking.
Critics say widespread equities dodging can only partly be laid at the door of bean-counting rules.
It has created an aberration: the UK is home to the second largest funds industry in the world and yet, across the Square Mile from asset managers’ gleaming skyscrapers, companies struggle to find investors with appetite for the shares they are trading.
The impact is depressed company valuations compared to those whose shares transact on exchanges in countries that have hung onto a home bias to back their own.
The upshot is cheap takeovers, fewer public companies, lower tax receipts and jobs heading abroad.
UK pension funds invest just over 4% of their assets in UK stocks, it was 50% not that long ago
As it stands, the spoils from great British breakthroughs will likely keep more Canadian pensioners cared for in their dotage than our domestic elderly – and meanwhile our retirement funds are supporting the growth of other nation’s future world beaters.
This is why the Government’s pensions investment review is vital.
In order to increase investment in productive UK assets, it is time that pensions are required to upgrade their UK equities exposure in order to retain their tax-advantaged status.
Alternatively, a voluntary target for UK equity exposure, closely watched by government, could be as effective as formal mandation, with public sector schemes leading the way.
If domestic investment in UK equities is sensible, channelling funds into the smallest public companies is urgent.
These companies have suffered the most from pension funds’ shift away from the UK and are less likely to be on the radar of international investors, including those sat in the Guildhall this morning.
They are closely tied to their local economies, deriving twice as much of their revenue domestically as their FTSE 100 cousins.
They have huge potential, with those trading on the AIM growth market supporting jobs that are about 50 per cent more productive than the national average.
And they offer infinite variety, straddling geographies and sectors from digital media producers in Glasgow to the makers of security scanning devices in Abingdon.
To encourage investors to consider smaller stocks, we must put our own money where our mouth is. The Mansion House Compact, a voluntary scheme to channel defined contribution funds into so-called ‘unlisted’ equities, should be asked to commit one pound in five to the AIM and Aquis markets, where international investors account for half as much of the shareholdings as on the Main Market.
The British Business Bank, the UK’s economic development bank, which supports 15 per cent of smaller business equity deals, should celebrate its 10th birthday next month by pledging to back public companies not just private ones.
And the London Stock Exchange’s sister company FTSE could help to get more passive money into the smallest stocks by improving index coverage of them.
It can’t happen soon enough. A recent report led by former Legal & General chief Sir Nigel Wilson found that the UK needed an extra £1 trillion of investment over the next decade to support a hoped-for 3 per cent economic growth rate.
That’s a lot of cash – even for those with exceptionally deep pockets that have gathered today.
