UK equities no longer a ‘must own’ asset class, shareholder group warns

UK equities are no longer seen as a “must own” asset class, according to a group representing some of the world’s largest investors that has called for a reset in relations with British companies to help drive growth in the market.

In its annual review published on Thursday, the Investor Forum said that “unless companies, investors, regulators and policymakers accept the reality of this situation, UK equities as an asset class will continue to diminish — to the detriment of all economic participants and society more broadly”.

The Investor Forum represents shareholders with more than £680bn in UK equities, or about a third of the FTSE all-share market.

“The declining relevance of UK equity markets over the last 25 years has been breathtaking,” said Andy Griffiths, the group’s executive director.

“It is crucial that the focus of any reform recognises the global nature of financing and seeks to create an environment in which UK-listed companies can once again thrive.”

He said that the UK needed practical steps from companies, investors and regulators “if we are to create a vibrant marketplace which can attract international capital”.

The Financial Times revealed last week that the group had written to FTSE 100 boards to try to calm a developing fight over the role of stewardship and corporate governance with the offer of new discussions to resolve issues and to work together on expanding businesses.

In its annual report, the Investor Forum again warned that relations between investors and companies “require a reset”, saying that as the “stewardship agenda expands, the focus of investors on bespoke engagement with UK companies has reduced”.

The report said the status and value of UK-listed companies needed “restoration” after traditional domestic owners, such as UK pension funds and insurance companies, diversified their holdings away from the UK in the past 30 years.

UK companies must now compete for capital in global markets and against other asset classes, it said. The group said the crisis in liability-driven investment, or LDI, provided “a powerful reminder” of the asset allocation decisions of pension funds “and their de minimus exposure to UK equities”.

UK pension fund and insurance company ownership of UK-listed companies had fallen from 52 per cent to just over 4 per cent between 1990 and 2020, it said, while international ownership had risen from 12 per cent to 56 per cent.

In the 11 months to the end of November, UK savers withdrew a further £10.8bn from funds investing in UK equities, making 2022 the biggest year of outflows in a decade, according to data from the Investment Association.

“UK companies must ensure that they can compete for money on a global scale, and reforms should encourage and incentivise long-term ownership,” the Investor Forum said.

The UK government is working with regulators and exchange officials on new plans to improve the rules governing British markets, as well as to help develop British businesses from start-ups to the point where they would consider a listing.

Investors were criticised by FTSE chairs in a report conducted by Tulchan Communications in November for “box ticking” on corporate governance and overbearing stewardship roles.

But the Investor Forum said better analysis of the underlying causes of the decline in the attractiveness of UK equities was required, “which must surely run much deeper than the criticism of the UK’s ‘gold-plated’ governance codes or the divisive issue of executive remuneration”.

Large institutional investors are also concerned that engagement with companies is too often dragged into conversations over executive pay, rather than focusing on strategy and growth.

The report said “the focus of company and investor dialogue should return to the creation of long-term value . . . Amid a proliferation of reporting initiatives and accusations of corporate governance ‘box-ticking’, there is a risk that both sides lose sight of this objective.”

Even so, the group said that “given the challenges that society faces with the cost of living crisis, and the large number of remuneration policies that will need approval in 2023, we would expect that remuneration issues will emerge at a significant number of companies. As such, the 2023 AGM season will likely be challenging.”