James Ashton, chief executive of the Quoted Companies Alliance, says if we want international investors to back UK companies then we must lead the way.
Backing: James Ashton says we must support UK listed companies large and small
The hundreds of international investors gathering in the City of London on Monday have a good idea of what to expect.
At the Government’s investment summit there should be a nod to the UK’s illustrious and industrious past, a showcase of promising sectors that could drive a high-tech, high-growth economy, and a polite plea to help fund them.
You would think it wouldn’t be a difficult conversation. After all, the UK has a lot to attract savvy financiers: advances in drug discovery, green energy, computing and more.
Ideas from all sectors emerge from university campuses to be incubated into exciting startups 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, as well as dispel recent pessimism about our prospects.
But what any international investor might reasonably ask themselves before signing a multi-billion pound commitment to the UK is: if this is a great place to put money to work, why aren’t they backing more?
It’s true. UK pension funds that a generation ago allocated more than half of their assets to UK shares now allocate a paltry 4.4 per cent. The ratio is among the lowest of any developed pension system, according to findings by think tank New Financial.
Proponents of the long-term shift toward bonds point to accounting changes at the turn of the century that spurred less risk-taking.
Critics say the widespread avoidance of stocks can only be partly attributed to grain-counting rules.
It has created an aberration: the UK is home to the world’s second-largest fund industry, and yet, across the Square Mile from the gleaming skyscrapers of asset managers, firms are struggling to find investors with an appetite for stocks they trade.
The impact is a drop in companies’ valuations compared to those whose shares are traded on exchanges in countries that have clung to a local bias to support theirs.
The result is cheap acquisitions, fewer public companies, lower tax revenues and jobs going abroad.
UK pension funds invest just over 4% of their assets in UK shares, up from 50% not long ago.
As things stand, the spoils of Britain’s great advances are likely to sustain more Canadian pensioners in their decline than our national elders, and meanwhile our retirement funds support the growth of future world leaders from other nations.
That is why the review of investment in pensions by the Government is vital.
To increase investment in productive UK assets, it is time pensions were required to improve their exposure to UK shares to retain their tax-advantaged status.
Alternatively, a voluntary target of exposure to UK equities, closely followed by the government, could be as effective as a formal mandate, with public sector schemes leading the way.
If domestic investment in UK shares is sensible, there is an urgent need to channel funds into smaller public companies.
These companies have suffered the most from the departure of UK pension funds and are least likely to be on the radar of international investors, including those who sat in the Guildhall this morning.
They are closely linked to their local economies and earn twice as much national income as their FTSE 100 cousins.
They have huge potential, as those listed on the AIM growth market support jobs that are approximately 50 per cent more productive than the national average.
And they offer endless variety, spanning geographies and sectors, from digital media producers in Glasgow to security scanning device manufacturers in Abingdon.
To encourage investors to consider smaller stocks, we need to put our own money where our mouth is. The Mansion House Compact, a voluntary scheme to channel defined contribution funds into so-called “unlisted” shares, should be asked to commit a pound in five to the AIM and Aquis markets, where international investors account for half of the holdings than in the Main Market.
The British Business Bank, the UK’s economic development bank, which supports 15 per cent of equity deals for smaller companies, should celebrate its 10th birthday next month by pledging to back public companies and not just private.
And the London Stock Exchange’s sister company, FTSE, could help raise more passive money in smaller stocks by improving its index coverage.
It can’t happen soon enough. A recent report led by former Legal and General Affairs chief Sir Nigel Wilson found that the UK needed an extra £1 trillion of investment over the next decade to support the expected 3 per cent economic growth rate.
That’s a lot of cash, even for those with exceptionally deep pockets who have gathered today.
Investment fair
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