In the late 1930s, Tate & Lyle chose to float on the London Stock Exchange (LSE) to reap the benefits of Britain’s recovering economy.
It was a sign of the stock market’s importance and ushered in decades of growth as the LSE became the engine room of British capitalism.
But all that came to a shuddering halt last Tuesday. Shareholders in Tate & Lyle voted to approve a £2.7bn takeover by a US rival, ending its 90-year stock market residency.
For many, the exit of one of Britain’s oldest listed companies is highly symbolic, underlining fears about the LSE’s waning influence as companies bet that their future lies on Wall Street or in the hands of venture capitalists.
Takeover offers for London market stalwarts like easyJet, Intertek, Mitie Group, Rotork and Segro in recent weeks have also fuelled fears about the future of the market.
Meanwhile, reports of £300bn merger talks between AstraZeneca and a US rival have raised questions about the FTSE 100 giant’s ties to the UK.
With companies leaving at a rapid rate, questions are being asked about why the London stock market has been allowed to wither, and why British investors aren’t riding to its rescue.
Shrinking feeling
As London’s own former champions have deserted the market, the ensuing exodus has drastically shrunk the size of the centuries-old market.
Back in 1997, £1 in every £2 invested by British pension funds was ploughed into the UK stock market. Today that figure is more like £1 in every £20.
Ten years ago there were also 2,365 companies listed on the market, but now there are just 1,500 – a remarkable drop of 36pc.
The drift away from public markets isn’t unique to the UK, but it is worse here than in the vast majority of developed countries.
Some defined benefit pension schemes have shirked stocks entirely, replacing them with bonds as they have matured and closed.
However, others – encouraged by advisers and consultants – have opted to replace their UK stocks with funds tracking global indices instead.
Scottish Widows, one of Britain’s largest pension providers, said last year that it would slash its allocation to UK stocks from 12pc to 3pc as it sought higher returns from overseas instead.
Even pension minnows, such as local government pension schemes, have cut their exposure to the UK.
Advised by Brunel Pension Partnership, Oxfordshire county council raised concerns several years ago that its UK stock holdings were too high.
Rather than 25pc, a more appropriate level would be around 4pc, it said – roughly the UK’s weighting in global indices.
That same conversation has played out in council boardrooms across the country, as pension funds became mesmerised by the boom in US tech stocks.
“The poor returns [of UK markets] provided pension schemes, and particularly their investment consultants, with the excuse to say, ‘Look, you can see the poor returns in UK equities … Therefore, we recommend you move from a traditional model to a global model,’” William Wright, the founder and managing director of think tank New Financial, said.
“They threw a lot of financial theory around diversification and long-term risk adjusted returns, and the poor performance of UK equities helped support that argument.”
The blame doesn’t just lie with pension funds, but successive governments that have dismantled tax incentives to lure pension funds into British stocks.
In Gordon Brown’s first Budget in 1997, the then chancellor announced the abolition of a tax credit that pension funds got on dividends.
Other countries disagreed. Australia has retained a similar tax incentive and their pension funds invest 24pc of their $2.7tn (£2.1tn) assets into the Australian stock market, while UK funds now just invest 4pc.
Still, pension funds receive plenty of tax relief – around £50bn or so – which has increasingly come in for criticism from some corners.
David Schwimmer, the boss of the London Stock Exchange Group, said last week that Andy Burnham’s new Government should look more closely at the tax grants.
“One that we are particularly focused on is around pension fund reform … not in any kind of mandated way, but in a way that is appropriately incentivised given today the roughly £50bn of tax benefits that go to the pension funds,” he said.
The case for buying British
As pension funds have abandoned the UK, with valuations of UK companies suffering as a result, it has become increasingly difficult for stock-pickers focused on Britain to succeed.
Many of the most prominent fund managers, and the biggest British funds, are focused on the US instead and most of Britain’s biggest funds have only a tiny proportion of their total investments in UK stocks.
But this raises questions about why British fund managers are not being encouraged to purchase more UK stocks.
Terry Smith is one of the country’s best-known fund managers, with a career nurtured in the City of London when he was a Barclays stock market analyst.
Terry Smith’s Fundsmith now holds just 2.8pc of its investments in UK stocks
Despite owing much of his success to Britain, his flagship Fundsmith fund has just 2.8pc of its investments in UK stocks, compared with 7.5pc in US companies, 5.7pc in French ones and 4.8pc in companies from Spain.
Smith, who has earned about £50m in the past two years, lives on the tropical island of Mauritius in the Indian Ocean, where he is building a museum for his collection of more than 200 classic cars.
He is not alone.
Baillie Gifford’s Scottish Mortgage Investment Trust, managed by fund manager Tom Slater, owns shares in just one British company, Wise, which accounts for just 1.3pc of its overall portfolio.
Similarly, the £50bn St James’s Place Polaris 3 fund, one of Britain’s largest funds and overseen by Justin Onuekwusi, places just 6.8pc of its investments in UK stocks, compared to 39.8pc in North American stocks.
Fund managers say this split reflects the relatively small size of Britain’s stock markets, particularly compared to those in the US. The UK’s listed companies account for around 3pc of the market capitalisation of stocks worldwide.
They also say they have a duty to maximise returns for investors and that investors can put their money into dedicated UK funds if they choose to.
‘Markets are somewhat sort of unsettled’
James Budden, the global head of marketing at Baillie Gifford, said: “We believe capital should be allocated to businesses with the greatest long-term growth potential, rather than according to a domestic quota or home-market bias.
“Investors seeking dedicated UK exposure can access that through UK-focused funds and strategies. By contrast, global funds are designed to give shareholders access to the best opportunities available worldwide.”
Nonetheless, there are many successful UK companies that could deliver strong returns from investment by big funds.
In some cases, the LSE’s struggles have even strengthened the attractiveness of such UK firms.
The FTSE 100 has outperformed the US’s S&P 500 over the last year, and reached a new record last week.
Gervais Williams, a veteran UK fund manager, said: “[Funds] should be buying not just because it’s the right thing to do, but because they’ve got too much correlation and it’s providing a wonderful rebalancing of their portfolios at a time when markets are somewhat sort of unsettled.
“It’s a case of whether pension funds want to keep up or whether they’re happy to stand by and watch very strong returns in the UK without doing anything about it.”
For the future Tate & Lyles of the world, Britain must hope that the London Stock Exchange can rediscover its magic before it’s too late.