The author is the president of Marshall Wace, a multi-strategic investment manager
The UK stock market is becoming a global headwind as US and Chinese markets take the lead. It has largely failed to participate in the global protests that began in 2015.
Of course, both the US and Chinese stock markets benefit from broader and dynamic hinterlands, with leadership in a plethora of new industries driving stock market performance. , from fintech, renewable energy and mobility, to technology, agriculture and artificial intelligence. But beyond these natural advantages, the US is now increasingly attracting companies from around the world, including the UK, to list on its exchanges.
They are shaped in part by the knowledge that US policymakers can rely on to support the stock market. But the US stock market also boasts much higher trading volumes and much higher valuations than any international market. We are getting to the point where companies can decide that we should all agree on a single global exchange, trading 24 hours and located in New York.
The UK is not alone in falling behind. All exchanges in Europe are more or less unchanged, relatively speaking. Daily volume so far in 2021 averages $554 billion in the US, $174 billion in China, and $47 billion in Europe. The biggest US stocks now trade more than the biggest markets in Europe. Apple trades $12 billion a day and Tesla $21 billion a day versus the Euronext exchange for a total of $8.1 billion a day and the London Stock Exchange just $6.1 billion.
But there are also homegrown reasons for the UK market to drop. There is nothing more special (or exotic) than the role of income funds, the signature dish of the UK fund management sector.
These funds are a UK-only phenomenon. They prioritize dividends over any other type of profit from a company and thus by definition penalize growth. There is no field of fund management that can be compared anywhere in the world. According to the Investment Association, of 744 billion pounds of equity funds In line with its criteria, around 29% are UK earnings or strategies relevant to all UK companies. The IA does not have a UK growth area and the fund balances are mostly international.
UK income fund managers believe they have a mission to protect pensioners’ earnings (an honorable goal), but this has led them to insist on requiring companies to pay out most of the income. their own instead of investing it back into the business. This is a form of financial downturn that discourages capital investment and stifles 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 fund has a stake of around £130m. SSE’s first half results better than the market expected, and the company also committed to increasing capital spending to £12.5 billion by 2026, up from its previous plan of £7.5 billion by 2025.
This includes a 2.5-fold increase in investments in renewable energy. The increased capital expenditure will be financed in part through the sale of a 25% minority stake in the business network and in part despite a reduced percentage of net income paid out as dividends.
Many analysts expect the stock to rise as the company doubles down on its renewable energy potential. But the stock closed down 5%.
Despite having some of the best renewable wind resources on the planet, the UK boasts few winners in the field. SSE has shown its ambition to become one. However, it received a decidedly disliked stock market. Could it be that income fund managers decide that the SSE will not get a commensurate return on its renewable investments? I do not think so. The investment framework for renewable investments in this country is generous.
The price drop may partly reflect the SSE’s rejection of calls from Elliott Management about the split. But I believe the main cause of the stock price drop is the fact that income managers sell off the SSE because the dividend no longer complies with their adverse fund criteria.
It’s sad to see this, as well as sad to know how frustrated so many growth companies are at the feedback they’ve received on their many London shows.
The City of London risks becoming a sort of Jurassic Park, where fund managers devote themselves to slashing coupons rather than encouraging growth and innovation. It’s time to get rid of the income fund sector and replace it with funds that focus more on growth than dividends, on the future rather than the past.
