Peel Hunt’s cunning plan

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A couple of weeks ago we wrote about some of UK small- and mid-cap broker Peel Hunt’s ideas for fixing UK equity market, which, by sheer coincidence, would also have been of huge benefit to UK small- and mid-cap broker Peel Hunt.

Their last missive was all about tax reform, but one King’s Speech later without a giant bung to the bottom rung of the LSE, and the PHunters have decided it’s time for more radical action.

Here’s head of research Charles Hall in a note published today:

A British ISA would reverse the long-standing withdrawal of funds from the UK market and turbocharge the UK public markets. This would drive economic growth and enhance tax revenue. We recommend switching the full £20k allowance to UK investments.

For readers beyond this sceptre’d isle, ISAs (individual savings account) come in various formats — including a ‘stocks and shares’ edition — that let people put up to £20,000 per year into various investments, and then incur no tax on the gains.

Naturally, these are pretty popular, with nearly £69bn of subscriptions in the year to April. For overall usage, the stocks & shares flavour comes second only to cash ISAs, commonly used as a pretty vanilla savings option, and is the biggest chunk by market value:

The UK represents about two-fifths of the total investment and is the single largest category overall, which might indicate investors don’t need much more encouragement to buy British:

Still, Peel Hunt proposes making all new subscriptions to ISAs “fully focused” on the UK, saying, somewhat obviously:

The quantum invested would make a material impact on the UK market.

And noting, even more obviously:

It would limit choice for investors.

How could such a system work? Unsurprisingly, Peel Hunt — which says its average client market cap is £690m — thinks ensuring small- and mid-cap businesses get the attention is important:

It would be important to have a straightforward eligibility process to ensure that both ISA investors and providers have clarity. This could be achieved by requiring companies and funds to self-declare that they are eligible, which could be based on a market cap on a specific date (eg 30 March) to be eligible for the next tax year. For simplicity, it would make sense to have only one cut-off period in order to avoid changes in eligibility through the tax year.

We see a £1bn cut-off as being a sensible level, as that would incorporate a meaningful proportion of the small & midcap sector and would be broad enough to provide investors with choice. It would also encompass a material number of funds that invest in UK smaller companies.

We would incorporate any company across the markets with a market cap of <£1bn, including fully listed, AIM and Aquis or fund that invests in eligible companies.

They add:

We would recommend including any company outside the FTSE100, including AIM and Aquis. This would provide a broader range of companies for investors than the £1bn cut-off and would also provide clarity over inclusion. Eligibility could be determined either by the start of the period cut-off (eg 30 March), or reflect changes to the indices through the year.…

This would include all listed companies as well as AIM and Aquis. This would be simpler to administer and provide greater choice for investors, but would be less well targeted.

The Peel Hunt note is labelled as a “marketing communication”. We suppose “nakedly self-serving plea to curtail financial freedom” is less catchy.

Still, it could make for a beautiful new relationship between investors and UK plc: