The author is chairman of Marshall Wace, a multi-strategy investment manager
The UK stock market is becoming a global swamp as the US and Chinese markets move forward. He largely failed to participate in the world rally which started in 2015.
Of course, the US and Chinese stock markets benefit from a more dynamic and larger hinterland, with leadership in a number of new industries that are driving the performance of stock markets, fintech, renewable energy and energy. mobility to medical, agricultural and artificial intelligence technologies. But beyond these natural advantages, the United States in particular is now attracting more and more companies from all over the world, including the United Kingdom, to be listed on its stock exchanges.
They are drawn in part to the fact that American policymakers can count on them to support the stock market. But the US stock market also has much higher trading volumes and much higher valuations than any of its international peers. We’re getting to the point where companies may decide that we should all just agree on one global exchange, traded 24 hours a day and located in New York City.
The UK is not alone in falling behind. All European stock markets are more or less moribund, relatively speaking. So far, daily volumes in 2021 have averaged $ 554 billion in the United States, $ 174 billion in China and $ 47 billion in Europe. The largest US stocks now each trade more than the largest European markets. Apple trades $ 12 billion a day and Tesla trades $ 21 billion a day, compared to $ 8.1 billion a day on the Euronext stock exchange and the London Stock Exchange at just $ 6.1 billion.
But there are also internal reasons for the decline of the UK market. None is more special (or ridiculous) than the role of income funds, the flagship dish of the UK fund management industry.
These funds are a unique phenomenon in the UK. They favor dividends over any other type of return from a company and therefore by definition penalize growth. There is no comparable fund management industry in the world. According to the Investment Association, of the £ 744 billion of equity funds that meet its criteria, around 29% is UK income or related UK strategies for all companies. AI does not have a growth sector in the UK and the fund balance is mostly international.
UK income fund managers believe their mission is to protect the income of retirees (an honorable goal), but this leads them to insist that companies pay the lion’s share of their income rather than reinvesting it in the business. . It 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 around £ 130million. SSE’s first half results were better than the market had expected and the company also pledged to increase its capital spending to £ 12.5bn by 2026, against a previous spending plan £ 7.5 billion by 2025.
This included a 2.5-fold increase in investments in renewable energy. The increase in capital spending would be funded in part by the sale of a 25 percent minority stake in network operations and in part by a reduced proportion of net income paid out as dividends.
Many analysts would expect the stock to trade as the company doubles the potential of renewables. But the stock closed down 5%.
Despite some of the best renewable wind resources on the planet, Britain has very few successful companies in this sector. SSE showed the ambition to be. Still, it received a decisive boost on the stock market. Maybe the income fund managers decided that SSE would not make an adequate return on its revolving investments? I do not think so. The investment framework for renewable investments in this country is intentionally generous.
The fall in prices may have partly reflected SSE’s rejection of Elliott Management’s calls for a break. But I think the main driver of the share price drop was the income managers who sold SSE because the dividend payout no longer met their evil fund criteria.
It’s sad to watch this, just as it is sad to hear so many growing companies how discouraged they are by the feedback they get on many of their roadshows in London.
The City of London risks becoming a sort of Jurassic Park where fund managers focus on cutting coupons rather than encouraging growth and innovation. It is time for the income fund industry to be phased out and replaced with funds focused more on growth than dividends, on the future rather than the past.