Unlock the Editor’s Digest
Roula Khalaf, Editor of the Financial Times, curates a selection of noteworthy stories in a weekly newsletter.
Fund managers have expressed concerns at a Downing Street meeting about the negative sentiment towards the London stock market, suggesting that UK pension funds should be required to invest a minimum of 5 percent in domestic equities. This assembly of UK equity experts, led by Nick Lawson, CEO of Ocean Wall, engaged with Varun Chandra, the government’s adviser on business, to discuss strategies to enhance public equity markets.
The managers voiced their worries about the UK’s equity market conditions, noting that investor confidence is extremely low. They identified several issues, including a higher rate of delistings compared to new IPOs, a significant valuation gap with US firms, and UK companies being acquired cheaply by private entities and foreign buyers.
Furthermore, it was pointed out that domestic pension funds have been net sellers of UK equities for nine years, leading to a "doom loop" for companies.
The meeting took place shortly after DoorDash secured a £2.9 billion deal for UK competitor Deliveroo, highlighting the trend of UK companies looking abroad, especially to the US, due to prolonged underperformance, listing costs, and governance burdens.
Proposals were made to increase domestic equity investments by UK pension funds through potential mandates, with suggested targets of 5 percent, 8 percent, or 10 percent, prioritizing defined contribution schemes over defined benefit ones. Lawson supported the idea of “gently guided mandation.”
Some participants suggested that such a change could create a beneficial "virtuous circle" for companies, markets, and savers by bolstering confidence and valuations. However, the concept of mandation is controversial, with pension fund executives warning it could interfere with their duty to ensure optimal returns for investors.
Pension funds are anticipated to sign a voluntary agreement this month, extending the 2023 Mansion House compact, to invest 10 percent in private assets by the end of the decade, with half of that in the UK. The Financial Times understands there will be no mandate to invest in listed stocks.
Although former Chancellor Jeremy Hunt considered mandation, it was not implemented before the last election. Current Chancellor Rachel Reeves has not dismissed the possibility, but ministers remain cautious. Shadow Chancellor Mel Stride criticized the concept as desperate, emphasizing that pension funds should make decisions in savers’ best interests.
The meeting included esteemed stockpickers such as David Cumming of Newton Investment Management, Andy Brough from Schroders, and Michael Stiasny from M&G Investments. A source close to the National Employment Savings Trust (Nest) indicated the priority is members’ best interest, noting Nest’s public commitment to UK investments. Nest, managing over £50 billion, had 1.75 percent of its assets in UK equities as of the end of March. Liz Fernando, Nest’s Chief Investment Officer, has been urging partner managers to seek UK assets.
A government representative stated that they are working to ensure businesses have access to the necessary finance for growth and that stakeholder engagement is crucial. The final report on the Pension Investment Review will be released soon, considering how to ensure unlocked investments benefit the UK.
