Some clients are quite surprised when they learn that over 60% of the equity content of their portfolios is invested in the US, with only a very small percentage held in the UK. This is by no means unique to the portfolios our clients hold. As you will see later, almost all pension and investment fund managers have been moving away from UK funds over many years.
The government is acutely aware of this and, with some justification, feels that this might be ‘bad for Britain’. Accordingly, in last week’s Budget, an additional ISA allowance was introduced, which only applies if one invests in the UK. There is now also a requirement for UK pension funds to disclose how much of their members' money is held in the UK. Presumably the govt. is hoping to turn things around and shift the focus back to investing in the UK – I wish them luck!
With the above in mind, I was particularly interested in the following article from Saturday’s Times by David Brenchley of Investment Eye’
“MPs aren’t betting their pensions on UK funds — and nor should you, because we all know not to put all our eggs in one basket
Sadly, MPs have very little “skin in the game” when it comes to investing. I often talk about the importance of fund managers having skin in the game — that they should invest meaningful amounts of their own, personal money into the funds that they run.
So the same should surely go for MPs. If they want to force us to invest a significant amount of our money into UK equities, they should do the same themselves.
In his budget on Wednesday the chancellor, Jeremy Hunt, created a new UK Isa. He wants to give us an extra £5,000 Isa allowance a year — on top of the usual £20,000 — but only if we use it to invest in UK-focused assets.
It feels like he is accusing ordinary, retail investors like you and me of somehow having abandoned the UK stock market and being responsible for the state of the economy.
The creation of this new Isa is rife with problems. If you invest that £5,000 into British businesses and then invest the rest of your £20,000 allowance overseas, that will mean you will have 20 per cent of your Isa portfolio invested in the UK stock market.
Most investment experts would say that having this much of your money in a single market would leave you overexposed, not least when the UK only accounts for less than 4 per cent of the global index.
Even leaving that aside, this is only OK if others do the same. Do MPs back UK shares? Do they heck. As of the end of June 2023, the Parliamentary Contributory Pension Fund (PCPF), which provides MPs with a pension for life, had £10 million of its £784.7 million of assets invested in UK equities. That means the UK accounts for just 1.3 per cent of the fund.
Where’s your skin in the game, Hunt and Sunak?
And what of the implication that ordinary investors are shunning the UK stock market? Supporters of this view will point to the net £94 billion that was taken out of UK-domiciled funds investing in UK equities since 2016 as proof.
But the reality suggests the opposite is true: we actually already have far too much invested in our home market. Retail investors are already putting half of their Isa investments into UK-focused assets every year, according to the trading platform AJ Bell.
The government might well find that those people who do take advantage of the UK Isa will simply sell £5,000 worth of UK assets from their regular stocks and shares Isa and move those investments to a UK Isa, freeing up more room to invest in global stocks.
One of the first things you are taught when you start investing is not to put too many of your eggs into one basket: you must diversify your investment portfolio.
Another key rule is to allocate your investments to the areas that you think are going to give you the best return over time. You should not choose investments out of some vague philanthropic, patriotic duty to the UK economy.
The extra Isa allowance is welcome. The £20,000 limit hasn’t changed since 2017. If it had been increased with inflation, it would be £25,000 already (though few people are in a position to save this much). That the extra cash has to be invested in UK assets is rather less welcome (not least because we don’t know exactly which ones will be eligible yet).
If Hunt and the British Isa’s cheerleaders in the City expect it to magically increase UK companies’ share prices or to encourage more companies to list on the London Stock Exchange, they will be disappointed. A British Isa will have absolutely no impact on the UK stock market. I don’t know how they can’t see that.
Considering that the £20,000 allowance is already more than half of the average annual salary, I, and most people my age, have no need for an extra £5,000 allowance.
The only savers that will open one will be those that regularly max out their £20,000 allowance. That was 1.6 million people in the 2020 to 2021 tax year, according to HM Revenue & Customs. But half of those were savers who maxed out their cash Isa — not investors. Only 802,000 maxed out their stocks and shares Isa allowance.
The boost that the UK stock market would get if all of those 802,000 people invested £5,000 into UK companies would add up to £4 billion. It sounds like a lot of money, but it accounts for only about 0.2 per cent of the combined worth of all companies listed on the FTSE all-share index. That’s a drop in the ocean.
And that’s assuming that all those who max out their Isas every year actually want to invest in UK stocks. AJ Bell surveyed 1,852 of its customers and found that only 14 per cent thought that the UK Isa was a good idea.
I won’t mince my words: it’s a terrible idea. And until MPs are forced to use their own pension fund to invest significantly more into UK stocks, they can’t really start lecturing you and me about how we’re not backing Britain.”
David Brenchley
I am inclined to agree with most of what David says; the most important sentence being, “You should not choose investments out of some vague philanthropic, patriotic duty to the UK economy.” There is a reason why fund managers are eschewing the UK market in favour of the US and it is because almost all technology companies are listed there. The UK market is largely made up of what I would describe as ‘old world’ companies, miners, oil companies and banks etc. and I think most would agree that there appear to be greater prospects for growth from the new tech businesses in the US, AI for example. Even our own ARM Holdings (a computer chip manufacturer) faced with the choice of listing in the UK or the US, chose the US; I would imagine this decision was a ‘no-brainer’ for the board.
I hope you found this interesting and, as always, if you have any questions about this piece or any other finance-related matter, please do not hesitate to contact me.
Yours sincerely,
Graham Ponting CFP Chartered MCSI
Managing Partner
