As the FT notes this morning:
More UK companies are drawing up plans to shift their stock market listings to the US, bankers say, in a growing exodus that threatens to undermine London's effort to reinvent itself as a vibrant hub for global equities.
It's an interesting suggestion, so why is this happening?
The FT suggests there are a number of reasons, of which "the prospect of a government willing to spend hundreds of billions of dollars on infrastructure" is one that apparently appeals to investment bankers. How very odd you might say that they so like public money, except for the fact that the opinion is wholly logical: the foundation of market success is always the quality and quantity of government spending in modern economies.
There are, however, other good reasons for this move. In particular, UK pension funds have almost given up investing in the shares of UK companies now. In a little more than two decades such shares have fallen from half of portfolios to just 4% whilst holdings of bonds by such funds now exceeds 70% of their value. UK investors are just no longer interested in what UK companies, and companies more generally, do.
Although, if I am candid, I think it more than that. They are no longer interested in equities because unlike the more ideologically driven US markets they have seen through what the modern company does.
As research I did with others at Sheffield and Queen Mary, London showed, the modern corporation often pays out more by way of dividends than it earns by way of profits. It succeeds in doing so by ever-increasing its borrowing and by undertaking arbitrage between various financial reporting standards. In particular, they are prone to abusing the differing rules of UK generally accepted accounting principles and International Financial Reporting Standards in group accounts meaning they recognise much more profit in the group parent accounts than they do as a result of actual trading by the group as a whole and it is this parent company pot that they use to pay dividends.
Astute investors have, I think, rumbled this game-play much beloved of all companies but readily apparent in those in the UK because we require that group parent companies publish a separate balance sheet which means that in this country this abuse is apparent in group accounts. As a result, they take the risk warning those accounts provide and avoid investing in such entities. UK pensioners are better off as a result.
There is, however, a bigger message in here as well. That is that Keir Starmer's belief that the private sector will provide the salvation for UK investing is wholly misplaced. Large UK companies are the worst at investing in proportion to size and number of employees. They just don't do that any more. They look to financialisation for their profits, and not actually making money, whilst innovation is very much off most of their agendas. To pretend that a partnership with the private sector is the way forward for the UK is, then, wrong. The UK private sector has no interest in the future. Their purpose is to turn debt into dividends. That is it. Starmer might want to stop that. Unless he does his ideas about the private sector are wholly misplaced.
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Not just the UK though. Here is an article that talks about Cisco
https://www.nakedcapitalism.com/2023/03/losing-out-in-critical-technologies-cisco-systems-and-financialization.html
One example from the article:
“From October 2001 through October 2022, Cisco spent $152.3 billion—95 percent of its net income over the period—on stock buybacks for the purpose of propping up its stock price. These funds wasted in pursuit of “maximizing shareholder value” were on top of the $55.5 billion that Cisco paid out to shareholders in dividends, representing an additional 35 percent of net income. Besides absorbing all its profits over the 21 years, Cisco took on debt and dipped into the corporate treasury to fund these two types of distributions to shareholders.”
And in Europe too, our research showed
There’s that word again; buyback. Really, unless this practice is outlawed quickly and universally it’s inevitable that investment in shares will continue to decline as no-one can know what their real value is.
Looking at the piece linked led to another: ‘Salve Lucrum’ (‘Hail, Profit!’) – quoting a mosaic found in Pompeii. Although about (and originating from within) the US Health Care Industry, it is subtitled ‘The Existential Threat of Greed in US Health Care’, one feels it also applies to many others. (See https://angrybearblog.com/2023/03/salve-lucrum-the-existential-threat-of-greed-in-us-health-care)
Will Hutton recently wrote an article in the Observer saying that things could work out for a Starmer government because there were signs that some in the City of London were beginning to think about how they could work with Labour to invest in rebuilding the UK.
At the time I was surprised by the niavety of one of our more experienced left of centre political/economic commentators and given the information that this blog continues to reveal about how the City of London actually operates I see no reason to reverse my opinion.
I posted a link to that article a couple of days ago on another of Richard’s blog posts.
I was surprised by it too, but noted that Hutton expressed surprise that so many business leaders appeared to have the stirrings of a social conscience and appeared to want to invest to improve the life chances of a wider section of the population.
I have to confess that I’ve reached my three score years and ten with my propensity to naivity pretty well intact, but I couldn’t help wondering if they’d *finally* realised that for many of them the ultimate source of their profits is the UK consumer and they’re not going to make any profit if the UK consumer has no money to spend on their goods and services?
Of course, the UK consumer won’t have much money to spend without some state investment, too, but to me, at least recognising the significance of consumers having money in their pockets seems like a step in the right direction.
Michael Hudson has long made the same case against share buybacks. It’s turd polishing of the highest order.
You are absolutely right about Keir Stymied – as someone said in the Guardian not so long ago, Laboured will not be able to undo Tory damage on the cheap.
Stymied will think that he can because he is Tory in everything but name.
As for the private sector the only thing they are interested in is more PFI.
Ah…PFI – the Pubic Fraud Initiative.
Richard,
Research shows that companies that buy back do not invest in staff, products and so on.
Essentially the companies are stripped of cash.
In the UK this was largely driven by accounting changes (in the 1990s) that meant pension assets and liabilities were marked to market and the P/L of that being shown directly as part of a firm’s overall P/L.
It was a well intentioned change to ensure that companies could deliver on pensions promised to employees but the the “side effects” have been significant.
The problem is that we don’t really know what the liabilities are (as we don’t know how salaries/inflation will evolve). Ever more elaborate attempts at ALM miss the point…. and the point is that life is uncertain… and the best protection is to save in assets that are genuinely productive (ie deliver stuff that we will need in the future) with the risks inherent in this borne by the institution best able to bear it (the State).
So, we need
(1) a “living State Pension” with all other savings being optional and not tax advantaged.
(2) savings vehicles that can channel money into productive investment… because we know from experience that the stock market does not do this.
(3) some serious though about how tax policy needs to change to reflect (i) a rise in infrastructure spending today (ii) higher transfer payments to pensioners in the future.
Agreed
Is there a limit to the frightening picture of progressive financialisation in private sector companies and international arbitrarging rather than investing in real products and services?
Is Will Hutton’s piece about the City creating a fund to invest in real products and services, and maybe partner government an indication that we are approaching the limits to financialisation etc.?
It does seem there is so much momentum behind companies considering moving to EU/US attracted by ‘green deal’ subsidies and/or all the brexit trade barriers around this isolated economy, that when/if Labour gets in, it may be too late.
Re your second para, maybe, but only here
How can you keep getting this wrong, despite having this pointed our to you time and time again?
Defined Benefit (DB) pension schemes were previously the main investors of private individuals’ pension investments. While these were still open to new members and to new accrual, a significant allocation was made to equities, as this asset class has historically had the best long-term returns over any 5-year+ period.
As DB schemes in the private sector have closed to new members / new accrual, and therefore become cashflow negative , they have needed to focus on managing the liabilities as they mature. This has resulted in increasing allocations to government bonds (and corporate bonds) to match the pension promises to the members.
In contrast, as DB schemes have closed, private individuals have been directing their pension savings into defined contribution (DC) schemes, the vast majority will be in equity investment, probably 100% in equities in the early life of the individuals and then potentially reducing over time as retirement approaches.
If you only look at the (declining) DB schemes above and ignore the (growing) DC schemes, then you will continue to draw the wrong conclusions.
I got it as wrong as the FT did
Or not at all in that case
And your belief in the rational DB investor is quaint and utterly wrong
And I notice that you do, of course, ignore the issue I highlight that does not suit your agenda
How very odd
You did say ‘in particular’ before launching into that data which does not relate to the vast majority of pension plans in the accrual phase, so I think you should cut Jenrick some slack.
As to your main point that the private sector doesn’t invest enough, can you think of any planning or regulatory change in the last 15 years of conservatism that has made it easier for the private sector to do so with their own money and at their own risk? I can’t off the top of my head. Possibly offshore wind, but that’s heavily subsidised so doesn’t count.
Most pension funds, by far as DB
Shall we deal with realities here?
Why do we need regulatory change for people to invest?
There was an item on the radio this morning about this concern. After mentioning various factors for and against listing in the UK or the US (including pension funds moving most of their investments away from equities, and UK regulation, and Brexit) there was one that was only mentioned in passing but which it seems to me trumps all the others: at present, share valuations for companies listing in the US are about double the valuations for companies listing in the UK. It really is a no-brainer to list in New York rather than London if that doubles your money.
Yes
And it is bizarre
Only DB pension funds are move assets away form equities. SC funds are constantly increasing exposure to equities. Valuations aren’t double, that’s nonsense.
So it’s not bizarre, it’s just a lie. Of course anything that points our Richard’s ignorance doesn’t get posted on here.
A lie that is widely reported throughout the reputable financial press?
Of course it is
Just reporting what I heard on the radio, Bill.
I’m not a share valuer, but it did not surprise me to hear that US markets usually approach valuations in a more optimistic frame of mind than the UK. For example, I understand the current S&P500 10-year P/E Ratio is 28.3, which is about 40% above the average. And FTSE listed shares usual have a lower PE valuation, and currently is below the long-term average. Perhaps double is too much: what number would you suggest? Or are you suggesting that UK and US markets approach valuation in exactly the same way?
As for pensions, let’s throw some ONS data at it. e.g.
https://www.ons.gov.uk/economy/investmentspensionsandtrusts/bulletins/fundedoccupationalpensionschemesintheuk/apriltojune2022
Feel free to suggest something else. Again, are you saying the overall amount or proportion of pension fund investments in equities has increased or stayed the same in say the last 15 to 20 years?
Good work Andrew
And the ratio of DB to DC totally reinforces the point I make
UK Banks are the worst in international terms at providing Capital for small firms and start ups, in the US there remains funding from VC sources and various equity deals while in Germany you have a whole section of banking that exists for funding middle sized business.
As with your idea that Pensions should have to invest a percentage (say 20%) into Social or green funds to be accepted as valid perhaps the Government should insist that a percentage of lending by each UK Bank has to be for SME in business development loans that exclude Invoice Financing or property?
If the banks will not lend because it is difficult, expensive and risky perhaps they will have to be forced?
After 258 comments you have at last made a good one
My late father was a Trust Officer with the Midland Bank Executor and Trustee Company, when I pushed him for some advice on what to put my money into, he usually replied The Bookies because you will know in a matter of minutes if you have made a profit or not.
It certainly seems to me that The Stock Market is no more than a respectable Gambling Den because its transactions bear no relationship to the value, perceived or otherwise of the Companies whose shares are traded on it. In addition because of the way funds are directed into it through tax breaks it has all the hallmarks of a Ponzi scheme
How many more time can the flaw in your argument be pointed out, only for you to ignore it?
There are very few private sector DB schemes that still open to new accrual and even fewer open to new members.
That means that schemes are maturing and their liabilities are falling due. As people start taking benefits, and these schemes become cash flow negative, they need to invest more in assets to match those liabilities. Hence the massive shift from equities to bonds over the last 10-20 years.
That’s the reason, nothing more to it than that.
At the other end, new pension money is going into DC schemes and the majority of thst money is going into equities.
Not sure why you’d try and deny these indisputable facts?
You ignore the data
Look at that from the ONS referenced here earlier
Then note the dominance of DB and not DC
And then your argument looks very hollow indeed when the data on investments there and verbal balance of funds between the two types is noted
Why is it that you choose to argue whilst ignoring the evidence?
You might also might like to explain why multiple postings with different identities help make your case
The ONS state that total pension fund assets in the UK are approx 2.7 trn, of which private sector DB and hybrid scheme are 760 bn.
As others have already mentioned most of those DB schemes are closed to new members and are in runoff, so won’t hold as many equities.
That still leaves approximately 2 trn of assets which will mostly be held in equites, and very little in government bonds.
http://www.ons.gov.uk/economy/investmentspensionsandtrusts/bulletins/fundedoccupationalpensionschemesintheuk/july2021toseptember2021
To put it bluntly, what you are saying in your post is quite utterly incorrect.
Maybe you should read the latest release
And read it properly
It flatly contradicts your claims
I am not posting any more of this nonsense
For a more digestible form of data, and comparisons to some other countries, it may be instructive to look at page 18 of this : https://www.thinkingaheadinstitute.org/content/uploads/2022/02/GPAS_2022.pdf
Perhaps those taking a different view could provide some data in support, rather than just making assertions.
Many thanks
I may repost some of this
The ONS data only covers FUNDED occupational pension schemes, so does not cover unfunded public sector pensions and most of the private sector DC schemes.
However, looking at the latest date, given that is something you are insistent on:
https://www.ons.gov.uk/economy/investmentspensionsandtrusts/datasets/fundedoccupationalpensionschemesintheuk
We can see that equity makes up 35%, 21% and 55% of pooled investments for DC, Private DBH and Public DBH pooled investment holdings, not accounting for more equities which will be held in the “mixed asset” line item.
It is annoying that they combine the DC and Private DBH direct holdings but even then they hold a lot of equities, though as already mentioned because they are closed to new members and are in run-off (which you can clearly see in the data) it is not surprising Private DBH schemes hold a lot of bonds for hedging purposes.
if we sum the total equity holdings, bearing in mind the above (occupational schemes only, Private DBH runoff etc) we still get to at total holding of 519 bn equities before accounting for other holdings (Hedge funds, mixed funds, private equity etc). Which is just over 21.5% of total assets of 2394 bn.
The equivalent holdings of government bonds (which we can assume will mostly but not entirely be Gilts is 508 bn. Total (including corporate) bond holdings by the same measure are 865 bn, so 36.1% and it is again worth pointing out this figure is skewed higher because of the end of life nature of Private DBH schemes.
The remainder of the DC pensions market (non-workplace, non-occupational etc) whose assets are around the 800 bn mark are going to be “lifestyled” in some manner which means bond holdings will be maximum 40%, but in reality much lower, typically 25% or less, not least because bond returns have been abysmal for so long and equities have as ever dramatically outperformed them. Unfortunately data is hard to find for such schemes as they are not pooled in any way, held on the individual level.
Either way, your claims such as “In a little more than two decades such shares have fallen from half of portfolios to just 4% whilst holdings of bonds by such funds now exceeds 70% of their value” simply don’t stack up when compared to the data, before you. You are drawing conclusions from the FT article which simply don’t follow from the subject.
For example, it is much more likely that firms are looking to list in the US because Biden’s Inflation Reduction Act offers large tax breaks to firms listed and manufacturing onshore in the USA, so FTSE 100 firms (which make most of their revenue and profit outside the UK anyway) might choose to move listings there to take advantage, as opposed to the UK where the corporate tax base is increasing.
I suggest you look at the data just posted by Andrew
Then:
A) Agree the point made is valid
B) You greatly exaggerate the DC issue
C) Ponder why you fixate on this instead of discussing the failings of financialised capitalism which is what I was actually addressing
D) Discuss that issue, or
E) Shut up
Having worked for a couple of years selling pensions I saw what an utter rip-off UK pensions are and left. Why is it that a Dutchman with a private pension will have a pot 3 x times that of a mug punter in the UK for the same investment – charges both obvious and hidden and churning.
The only pension that’s worth a damn in the UK is a SIPP but for that to work in your favour you have to actively manage it yourself.
Richard is quite right about the whole buy back scandal. Also just look at the level of dividends in the UK compared to Europe and Japan. The level of reinvestment of profits in Europe and Japan (and other countries) is of a whole order higher than in the UK.
I have a cousin who worked his whole life in the oil business ending up running major projects across the world. He is so risk averse a trait of many lowland Scots, my father was a classic example. I have tried without success to get him to take control of his pensions and make damn sure that a majority of the assets are invested out of Sterling.
Ukraine/Taiwan – all it needs is for Ukraine to really explode or a serious attack or invasion of Taiwan to occur and markets worldwide will collapse. % rates will soar and the insane UK property market already under threat will collapse and take Sterling with it. What then will the value of UK pensions be worth.
Stuart in ti’s deeply unfortunate event, which currency would you recommend, the US $?
This.
a direct quote from the Economist..
“ Defined-benefit (db) pension schemes, today worth £1.5trn, have gone from having around a quarter of their assets invested in London-listed shares in 2008 to less than 2% in 2022.A combination of regulatory incentives and the db schemes’ increasing approaching maturity with virtually no new contributions drove them away from the risk and growth potential of stocks and towards the safety of bonds.”
Defined contribution schemes and SIPPS which are both growing rapidly are significantly invested in equities.
See actual data on this now posted by Andrew here
Still wild claims made and no engagement with the issues
What is it about all you pension trolls?
How can someone who cuts and paste from an article in the economist automatically be a troll ??
Context
Nope!….It’s usually using the name of an ex sports person as a non de plume! It’s a dead giveaway!
Good – we agree DB schemes have moved out of UK listed equities, no doubt for their own good reasons.
Now, can you provide some evidence that DC schemes (which includes SIPPS, by definition) have increased their investment in UK listed equities over the same period, such that the total amount of pension money invested in London equities has increased or remained about the same?
Don’t know how relevant this is , but David Smith in the Sunday Times – who I have a soft spot for as he published a piece by me decades ago) cites Michael Saunders’ case for an infrastructure committee to counterweight the MPC, BoE, Treasury etc – to boost infrastructure investment year on year .
But then he takes a sideswipe at MMT – I queried , and referenced @RichardMurphy
https://twitter.com/JeremyAndrew11/status/1632327409885126656
Thanks
He has never displayed an understanding of MMT