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Roula Khalaf, editor of the FT, selects her favorite stories in this weekly newsletter.
The author is a senior consultant at Engine AI and Investa and former chief strategist for global shares at Citigroup
“The task of an investment banker is to take care where the money is.” This was said that a former colleague said many years ago. Maybe obvious and intuitive, but the best advice is often.
I can tell you where the money is not now – active British equity funds. According to Goldman Sachs, around £ 150 billion has flowed from them since 2016.
There are many reasons for this exodus. In the shares, the disappointing development of the British market caused investors to strive for better returns elsewhere. The weak relative performance and the high fees drove the capital into cheaper passive funds. The historical orientation towards homes aroused the desire to diversify in other stock markets.
As performance -oriented pension funds became mature and introducing liability -oriented investment strategies that aim to agree with payments to pensions, they sold British stocks and bought British government bonds. These steps were accelerated by regulatory and accounting changes. Gordon Brown in 1997 did not help the abolition of the dividend tax credit. Brexit not either.
Pension and foundation funds, which were attracted by the high returns of the “Yale Modell” portfolios, relocated capital of public markets in alternative systems such as real estate, infrastructure, hedge funds and private equity.
Many of these topics also took place in the USA. Morningstar data indicates that the increase in passive investment leads to the fact that only 37 percent of the US shares are actively managed, compared to 60 percent in 2015.
My key point is that the major capital losers in recent years have been active stock managers, even in the United States. These natural buyers of stock exchange passages were missing. Passive equity funds recorded inflows, but rarely participated in new emissions. You can only buy when the share is included in the index you persecuted, which usually takes some time. It seems that IPOs have become an unintentional victim of the ascent of the passive investment.
A healthy new emission market needs tributaries into active equity funds. The United Kingdom records unstoppable exposure of capital. In the United States there were some of the capital inflows, but in passive and not in active funds. This capital has contributed to re -evaluating the large technology values that are heavily weighted in the S&P 500, but has not found the way to the fund manager who can buy the next new emission. Hence the strange decoupling of the most important US stock indices that reach new highs, and the stock market proceedings that remain in the doldrums.
India is a country in which an increasing stock market is associated with hectic new emissions. But here most of the inflows flowed into active funds.
A lot was thought about the decline of stocking of stocks in the United Kingdom. The government was pushed to take measures that would lead local savings back to the domestic stock market. If a large part of this capital flows into passive funds, which is likely, there will probably be a re-evaluation of existing British Large cap shares. This could prevent them from moving their quotes to the United States, but it is unlikely that it will revive the domestic IPO market. In order to achieve this, political decision -makers have to redirect the capital to the fund manager, who are more into new emissions.
Private equity funds have attracted part of the drains of active public equity funds. This has financed its war trees for takeovers, but at the same time weakened the stock markets and thus created favorable targets. However, this can only go so far. The PE business model also needs a healthy IPO market to return capital to the final investors. In view of the declining development of active public equity managers, this exit path has become increasingly less common.
Perhaps the answer is that companies remain private. Avoid the effort of a stock exchange and short -term pressure of a fluctuating share price. After all, there is plenty of capital available in private markets. David Solomon, CEO of Goldman Sachs, recently gave exactly this advice, and he definitely knows where the money is.
“If you lead a company that works and grows and bring it to the stock exchange, you will be forced to change the way you do it, and you should really do this with great caution,” he said saidAnd indicates that they can now receive a large extent privately.
Persistent drains have significant consequences for the public stock markets. Fewer new shares were spent and more old shares were collected, which shrank the available investment pool. For many, this dequisition indicates a sickly market. In view of the declining demand, in particular through active funds, I consider it necessary to reduce the offer of public equity. Ultimately, this should support the share prices.
I spent the first part of my career as a British strategist. My main customers were active British stock managers. When her drains increased, I realized that I had to hang elsewhere, so I switched to a more global mandate. A career extensive step, but I should have switched to private markets. The money is really there.
