Financial capital flows through London like the River Thames, which has functioned as a conduit for commerce over centuries.
But too much of that capital is flowing off elsewhere these days when there are world-beating ideas to invest in within yards of the Thames’s towpath.
We have the perverse situation that the vast majority of our pension savings are being used to back companies outside the UK. That far-flung search for returns is designed to make for happy retirements, but funding global competitors so enthusiastically will only challenge the quality of life for our children down the line.
This is not a Little Englander point. After all, the best British companies adopt a global mindset from day one.To fulfil their potential, they need ready sources of capital at home.
That’s why so much effort is being focused currently on funding growth. That could be through the Lord Mayor’s mooted Future Growth Fund, a £50billion pot skimmed from defined contribution (DC) pension schemes in order to back start-ups before they are ready for the public markets.
Or it could involve retooling the Pension Protection Fund, the lifeboat for defined benefit (DB) schemes, as a superfund that can take on more risk and buy more equities. Plans are also afoot to lift some Solvency II regulations.
Just as strenuously, swathes of the fund management community are resisting interference.
Look at it this way: any partial mandate to buy British would only counter the accounting rules that have effectively mandated some of the switch of capital overseas.
For public sector pension schemes, it would be a case of better harnessing the state’s buying power.
It should be possible to deliver excellent returns for clients as well as adopting some home bias.
To any fund manager that says they cannot find growth opportunities on London’s main market, AIM or Aquis, I would say: you are not looking hard enough. There is much more to be done if we want our public equity markets to be fit for the future.
A greater portion of ISA funds could be steered into UK quoted stocks for investors that wish to continue their tax shelter. And, a decade after stamp duty was scrapped on AIM shares, isn’t it time the main market was afforded a similar benefit — especially as transaction tax is lower in many other European capitals, or does not exist on Wall Street?
The effectiveness of markets is defined by their liquidity. A plethora of buyers and sellers smooths pricing. Here, the UK is lagging the US.
According to Panmure Gordon, about 100 of the UK’s largest listed companies enjoy trading volumes in excess of £4 million per day, compared with almost all of the S&P 500. Further down the ranks, many trade infrequently.
An ongoing regulatory focus has caused many small cap funds to switch into larger stocks. The river of capital is in danger of running dry.
Funds benchmarked against the FTSE 250 and smaller have seen $7.8 billion of outflows so far this year, compared with $420 million of inflows into FTSE 100 funds, according to Bank of America research.
There is great focus on value — such as the loss of microchip designer Arm to New York — but volume is vital too.
The London Stock Exchange has lost 39 companies so far this year. That’s why we need a sharp focus on where funds should flow to have maximum impact. Today’s small caps are the large caps of tomorrow.
Clearly consent beats coercion. So what about one more idea to add to the list: a new type of investment vehicle that builds on the success that Venture Capital Trusts (VCTs) have had with wealthy backers over many years?
It could admit a wider set of investors and offer less tax relief than VCTs, but still reward long-term investment in UK-registered public companies below a particular market capitalisation.
It’s all part of turning the tide, for our growing companies and for the UK economy.
