A wind of change at the stock exchange
Paul Marshall is not a happy man. The boss of $55bn hedge fund managers Marshall Wace writes in the FT that London’s stock market has become a global backwater, a stagnant pool left behind by the surging rivers in New York and Beijing. The reason, he reckons, is British investors’ supposed obsession with income, which forces companies to pay so much in dividends that there is little left for investing in tomorrow’s growth. The UK’s biggest quoted companies are stodgy businesses with high yields and a dreary outlook, while those with genuine growth prospects do not get the rating they deserve.
The immediate cause of his ire is the somewhat unlikely case of Scottish & Southern Energy, which last month produced some perfectly respectable results, and promised to spend a lot more plonking windmills on the Dogger Bank in the North Sea. The shareholders were invited to contribute to this adventure by taking a cut in the dividend. Sir Paul’s fund has £130m invested in SSE. The shares fell by 5 per cent on the news.
He decided that it was sad to see this, given the following wind (sorry) of government subsidies and incentives for renewables, and he surmised that those short-sighted income funds were dumping the shares because of the dividend cut. Well, maybe. Alternatively, the price fall may reflect the difficulty of turning a conventional electricity company into one powered by the wind – which as we saw for several weeks last month, cannot be relied upon to blow when we want it.
However, Sir Paul’s more general point has some force. The London Stock Exchange is indeed a backwater when measured against the trading volumes and share ratings in New York or Beijing, but the harder question is what can be done about it. The FTSE 100 index contains two of the world’s major oil companies, two of its biggest tobacco companies, three world-scale banks and a major mining company. They can hardly be thrown out because they have poor growth prospects. Incidentally, they have been little help to the income funds Mr Marshall so dislikes; All bar BAT have cut their dividends in recent years.
In the cold logic of fund management, the key measure of success is not performance, nice to have though it is, but the ability to attract more capital on which fees can be charged. If calling your fund an income fund brings in the money, then the manager can hardly be blamed for concentrating on income.
One way it’s suggested to release London’s crouching tiger is to scrap some of the rules which companies must follow to get a proper listing, although this is a two-edged sword. Many fund managers are grateful in hindsight that they couldn’t buy shares in The Hut Group because of its voting structure. The shares soared, and have since collapsed faster than a mobile home in a gale. This week the Financial Conduct Authority dramatically widened the goal to allow future Huts to get in, a move that should help somewhat, although pricing exciting new issues remains hard. So far, half of this year’s initial public offerings in the UK are below their launch price.
Other companies might be put off by the growing influence of things that seem to have little to do with shareholder value and which might actually damage returns, particularly ESG, environmental, social and governance. A survey from currency brokers HYCM found that less than half of affluent private investors gave it priority when investing. Besides, with no definition of what ESG actually is, companies may struggle to comply. Never mind, Marshall Wace is on the case. “Marshall Wace endeavors to integrate Sustainable Investing principles into various investment strategies. We consider ESG factors and data for idea generation, identification of thematic opportunities and risk assessments”. Best of luck with the North Sea windmills, then.
Simple? Efficient? If only…
Who says the government has no sense of humour? Here is Lucy Frazer, financial secretary to the Treasury, explaining why HMRC will not be told to change the rules on capital gains or inheritance tax: “The government will continue to keep the tax system under constant review to ensure it is simple and efficient.”
Perhaps Ms Frazer finds filling in the tax return easy-peasy, but whatever else the system is, simple it is not. Tolley’s current tax guide has 45 chapters and has doubled in size in a decade. The Office of Tax Simplification (the clue is in the name) had recommended reform of CGT to bring the rates into line with those for income tax, by lowering the tax-free threshold and increasing the rate. No thanks, said Ms Frazer, it would all be too difficult, with knock-on effects and more work for hard-pressed tax inspectors. Into the long grass it goes.
It may stay there until after the election, but the Treasury’s desperate need for more money will surely ensure that the proposal will be retrieved after that, whatever the election result. The contrast between the tax on income and that on capital will become more painfully obvious from April, when National Insurance (effectively a second income tax) rises by 2.5 per cent, including the employer’s contribution. The growing gap between the tax on the lower-paid and that paid by the owners of capital is a direct affront to “levelling up”, but perhaps that was what Ms Frazer meant about simplicity.
No LV lost here
Next week the policyholders of LV= are scheduled to vote on their management’s proposal to sell the business they own to a private equity firm, Bain & Co. There is a strong chance that they will decline the offer of £100 each and a boost to with-profit savings plans. Judging by the last-minute burst of advertising, it seems that the company’s management has noticed. Please don’t call it panic, call it a carefully calibrated campaign to ensure that there is a strong, informed turnout.
Not all advertising is wasted, so it may be enough to turn the tide, but the LV board has not distinguished itself in this affair, and there seems no pressing reason to sell out of mutuality just now for the price of dinner for two.