The City of London: in danger of becoming a Jurassic Park?
The London Stock Exchange is dominated by dinosaurs. What can be done about it?
This was meant to be a red-letter week for the City, as new rules “intended to boost London’s role as a global centre for listing companies” came into force, said Huw Jones on Reuters. The hope is that a more relaxed regime will help the Square Mile “catch up with New York”. “The penny seems to have dropped that the London stock market is not the first port of call for fast-growing tech companies which, if they list in Europe at all, increasingly favour Amsterdam,” said Larry Elliott in The Guardian. Daily trading in Tesla alone on Wall Street is “worth more than three times the trades of the entire London stock exchange”. The Financial Conduct Authority wants to make it easier for tech founders to bring their businesses to market, while retaining sufficient protection (via sometimes controversial “golden shares”) against hostile takeovers. But last week Paul Marshall, who heads the $55bn hedge fund Marshall Wace, fired off a broadside arguing “it will take more than changes to listing rules to restore London’s mojo”.
The City will continue to be a “global backwater” until we address a far more fundamental malaise, said Paul Marshall in the FT. One crucial reason is London’s “signature dish”: income funds, which prioritise dividends over any other kind of return and, by definition, “penalise” growth and productivity because they discourage capital investment. These funds are “a form of financial decadence” and should be phased out. “The City is in danger of becoming a sort of Jurassic Park, where fund managers dedicate themselves to clipping coupons rather than encouraging growth and innovation.”
The immediate cause of Marshall’s ire was one of his investments, said Neil Collins on Reaction: Scottish & Southern Energy (SSE) last month asked shareholders to take a dividend cut to finance more wind turbines. Shares promptly fell. Short-termism, Marshall felt – although arguably many investors had valid doubts about SSE’s strategy. Still, his more general point – that “the UK’s biggest quoted companies are stodgy businesses with high yields and a dreary outlook” – has some force. The harder question is what can be done about it. “The FTSE 100 contains two of the world’s major oil companies, two of its biggest tobacco companies, three world-scale banks and a major mining company. They can hardly be thrown out because they have poor growth prospects.” And scrapping rules is a “two-edged sword”. Many fund managers are grateful in hindsight that they weren’t able to buy shares in The Hut Group because of its voting structure. “The shares soared, and have since collapsed faster than a mobile home in a gale.”