No, it wasn’t the pension funds that killed the London stock market

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The curious case of the stock market, the pension funds, in the library with the lead piping …

It wasn’t the pension funds wotdunnit!

It’s becoming a national obsession to lament the demise of the London stock market … there seems to have been a spate of articles recently such as this one in the Times, or this in the economist (who cover the subject every few months with varying levels of accuracy).

The recent focus on this may have been spurred by a report from the Tony Blair Global Institute for Global Change, co-authored with William Hague and grandly titled A New National Purpose: Innovation Can Power the Future of Britain

That report fingered local investors like pension funds as a big missing piece in the innovation and growth landscape. To be fair that report did cite a load of other important reforms and their suggestion on pension funds: consolidation (fine idea, but good luck with that) is not that controversial.

But unfortunately in popular press the tedious & lazy “it was the pension funds wotdunnit” shortcut continues as a trope. Not surprising, as it suits a lot of folks with loud voices to perpetuate that narrative. I want to talk about that’s unhelpful & wrong

Why it’s not helpful: it lets government off the hook for decade plus of stagnant growth in the U.K., subpar investment, lack of strategy, ducking institutional reform … and yes, Brexit

A look at comparable corporate performance gives you an indication of where to start looking for the real culrpit here, think: GSK vs Pfizer, Barclays vs JP Morgan. US companies have vastly outperformed U.K. peers this last decade. The Economist covered this here.

Following the corporate story is really important here. And where have UK listed corporates gone? Bought by overseas companies is the overwhelming answer (Source: Schroders).

54% of companies listed on the UK market a decade ago (per MSCI investible UK index) left because they were bought by overseas firms. World leading US firms snapping up underperforming laggards and promising rising stars

Maybe looking at market fundamentals would help: Spot the difference: US stock market earnings per share growth vs UK last 20yrs

Per JP Morgan Asset Management‘s excellent Guide to the Markets, US earnings per share are up 10x over last 30 years. In the UK market until last year’s energy driven spike EPS was barely above the level of 20 years ago. The ’08 crisis cast a huge shadow on corporate UK which arguably we have struggled to barely escape from, it’s a real problem, but that’s nothing to do with pension funds.

No, it’s not just a tech story and not just a 2010’s story. It’s more of a US-outperforming story. The sales growth of US companies has been consistently higher across sectors, and accelerated more broadly last 3 years. US companies sales growth has been 10-12% p.a. over last 3 years vs 6-9% pre-2019. Whereas the rest of the world has been steady at 4-6% the whole time.

US companies are, and consistently have been global leaders in recent times and so it makes sense that our pension funds would invest in them.

Indeed, turning to pension funds themselves, a bigger theme before the much-maligned de-risking took hold was moving from heavily home-biased stock portfolios to global. As a grad investment consultant in the early 2000’s I did a lot of projects helping pension funds make that switch.

And that’s just good investment practice, the heavy home bias had become an anachronism by the 2000’s, and there’s a solid base of evidence that investing globally ought to be the start point. Historically this has been better for most countries (the US is one exception to that). Source: Credit Suisse yearbook.

Today, the UK’s growing defined contribution pension funds invest £bs of our money every year into growth companies, into IPOs, they just do it with a global view, as they should do. By the same token Australian, Canadian and Japanese funds look at our market as part of their own global view.

As you can see from this excellent piece from Willis Towers Watson, UK pension funds’ domestic stock holdings as a proportion of total stocks are right in the middle of the pack from a global perspective (and you can see that a declining home bias is a feature globally). The UK is no great outlier here, and there’s really no argument for trying to roll back to the 90’s level of home bias.

In a world where you have global companies and global investors the reality is the location of listing is not a reliable indicator of anything much other than maybe some historical link. And the winner-take-all dynamic of this networked world has favoured the US – and possible China – over most others, and it’s not up to our pension funds to address this.

I do get that the move away from London listings IS a big issue for folks in the professions serving that market (lawyers, accountants etc) and that is a real economic issue. But if we want to address it we at least need to start with a correct diagnosis of the problem.

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