One of the factors that inspired our cover feature on bargain British shares is the prevailing cloud over the London market helping to keep prices depressed, and the reminders of that undervaluation in the form of a stream of offers, takeovers and departures. Even oil giant Shell, London’s largest listed company, hasn’t ruled out relocating to a more supportive market. Travel firm Tui left London for good this week and poorly performing RedX Pharma and e-Therapeutics have announced their respective delistings from Aim.
Value can be found in abundance across the market right now but what really matters is that liquidity and share price buoyancy re-emerge. For that to happen buyers need to return. Yet there is a degree of uneasiness in some quarters over efforts being made to reverse the trend of outflows, such as asking pension funds to disclose their UK equity weightings, even though the stock exchange’s problem stems largely from onerous regulations and unhelpful policies.
Not doing anything is compounding the impact on performance. The offloading of British shares by big institutions is a particular problem. UK pension funds’ domestic equity holdings have been cut by around 90 per cent in the past 25 years, a phenomenon that is not replicated elsewhere. As our columnist John Rosier recently pointed out, British providers are largely alone in underweighting their domestic market. Australian funds for example allocate around 38 per cent versus an index weighting of 1.3 per cent.
Resistance to the chancellor’s initiatives may be linked to a worry that the next step could be mandatory UK allocations. But this is not a fear supported by the facts. There are no elements of compulsion in any of Jeremy Hunt’s three key proposals to save London from further decline. First, in July last year he asked only that pension funds consider allocating 5 per cent to high-growth investments, with no requirement even that they be unlisted; second, last month he introduced a new allowance for British shares, leaving the existing £20k allowance untouched and available for allocation entirely overseas; finally, also last month, he asked pension providers to disclose their UK holdings.
Of course, the whole point of asking pension funds to disclose their UK holdings is to gently nod (or shame) them into holding at least the global index weighting. That would significantly help boost capital inflows to the market.
But there is another point. Pension funds are intertwined with society and Charles Hall, head of research at Peel Hunt, has pointed out that the lack of commentary on pension funds’ contribution to UK society or its economy stands in stark contrast to Australia’s largest DC scheme which has 3.3mn members. That scheme’s annual report devotes a whole section to how much the fund invests in Australian companies and the contribution it makes to the Australian economy. “This direct linkage,” he says, “is sorely missed in UK pension schemes.”
Governments should never dictate where fund managers and investors put their money but they are within their rights to encourage certain behaviours that have the potential to deliver economic benefits.
We already rope in pension funds to do their bit on climate change and many providers go beyond planning for climate risks. They wholeheartedly embrace the spirit behind the guidance on climate change and nudge members to think about how their money is allocated, not because of any improvement to returns this might yield but for the impact it could have on the environment, on people’s wellbeing, and in delivering ‘positive change’. Don’t be surprised if your pension fund asks you if you want it to do more to protect biodiversity, to tell it what aspects of deforestation matter most to you, or how comfortable you are with Mark Zuckerberg being both chairman and CEO at Meta, or if you want it to ask Meta to do more to educate people on the social dimensions of climate change.
One pension fund, the £7.7bn London Pension Funds Authority, has, encouragingly, found space to outline how its social infrastructure investments are enhancing local communities and local economic resilience. It could go further though, says Hall. It could outline how it is investing in UK public companies, and he notes that the portfolio has investments in just 13 public companies in the UK, of which only two are outside the FTSE 100.
Readers, I’d love to hear your views on this topic and the broader issues afflicting the London market. Click here to email me.
