Podcast Summary
UK pension schemes: The impact of UK pension schemes on equities has been a long-term drag due to deficits, but rising interest rates have led to many schemes being in surplus, releasing funds for investment or distribution
The issue of defined benefit pension schemes and their impact on UK equities has been a significant drag on the market for decades. These schemes, which are no longer open to new members, have been in deficit for years due to low interest rates. However, as interest rates have risen, the future liabilities of these schemes have become smaller, leading to many of them being in surplus. This has resulted in a release of funds for the companies involved, which can be used to invest in other areas or pay out to shareholders and employees. The impact of this issue goes beyond individual companies, with the tightening of pension rules leading to a shift of funds out of equities and into bonds, significantly affecting the allocation of capital in the UK equity market.
UK equity market tailwinds: The removal of a structural headwind (UK equities leaving pension funds) and the positive impact of auto-enrollment schemes create a tailwind for the UK market. However, the underlying issue of undervaluation may persist due to the UK's takeover code and incentives for directors.
The collapse of UK equities held by pension funds, a structural headwind for years, is no longer an issue as companies shift their focus to auto-enrollment schemes. This removal of a negative factor, combined with the increasing inflows into auto-enrollment schemes, creates a positive tailwind for the UK market. The underlying issue of undervaluation in the UK market, according to Leid Meideff of Gatesmore Capital Management, stems from the takeover code and the way board members are incentivized in the UK compared to the US. With fewer incentives for directors to align with shareholders, there's a lack of motivation for them to explore opportunities for growth and acquisitions. To address this issue, Leid suggests deregulation and encouraging directors to have a greater stake in the companies they oversee.
Equity ownership alignment: Improving UK corporate governance by aligning directors' interests with shareholders through increased equity ownership could attract top talent, maximize shareholder value, and reduce feelings of disregard from the board.
Aligning the interests of directors, particularly CEOs, with shareholders through equity ownership could help improve UK corporate governance and bridge the valuation gap. The UK market's reputation for underpaying CEOs makes it harder to attract top talent, leading to a less talented pool of CEOs running UK-listed companies. To address this, non-executive directors should own more stock than they currently do, as is common in the US. This alignment would help maximize shareholder value and reduce situations where shareholders feel ignored by the board. However, implementing this solution may face challenges, such as accommodating diverse boards and allowing directors to buy stock over time. Ultimately, allowing private equity capital into the UK markets could provide a shock to the system and bring back "animal spirits" in the market, leading to increased foreign investment and a renewed interest in UK equities.
UK market changes: The UK market is experiencing significant changes, including companies leaving and being bought out, leading to stock re-ratings and a potential slowdown in UK IPOs. To make the UK more competitive globally, addressing issues like director-shareholder alignment and outdated takeover code is crucial.
The UK market is undergoing significant changes, with some companies leaving the market and others being bought out by private equity firms. This realignment of supply and demand is leading to a re-rating of stocks and a potential slowdown in the number of UK companies moving to the US. However, the process of reversing the trend of pension funds and wealth managers reducing their holdings in UK equities is expected to be a long one. To make the UK more competitive globally, it's essential to address issues such as the alignment between directors and shareholders and the outdated takeover code, which creates unnecessary barriers for foreign investors. By making the UK more attractive to global investors, we can increase competition and boost economic growth.
UK business environment and foreign takeovers: The UK could signal a more business-friendly attitude towards foreign takeovers by revising the takeover code, reducing stamp duty, and deregulating listing requirements, while also promoting a shift in attitude towards private capital and allowing for more transactions to align directors with shareholders.
The UK business environment is perceived as overly welcoming for foreign takeovers, and this perception is fueled by a lack of understanding from some commentators and regulators. To signal a more business-friendly attitude, the UK could consider changes such as revising the takeover code, reducing stamp duty, and deregulating listing requirements. Additionally, there's a need for a shift in attitude towards private capital and allowing for more transactions to create better alignment with directors. The UK's productivity problem is complex and multifaceted, with financial services masking poor productivity in other sectors. As activist investors, the focus is on finding companies that have lost significant market share and engaging with management and shareholders to unlock value. The biggest mistakes made by company management in the specific types of companies the speakers look at are not being transparent about challenges and issues.
Trust and Mistakes: Transparency and ownership of mistakes are essential for building trust within a company, while hiding them can negatively impact stock price and reputation. Active investors should approach underperforming companies with an open mind and consider changes like aligning non-execs with shareholders and cost savings programs to rebuild trust.
Transparency and ownership of mistakes are crucial for building and maintaining trust within a company, especially for CEOs and management teams. Hiding mistakes or denying their existence can lead to a breakdown of trust, which can negatively impact a company's stock price and reputation. For active investors looking to build trust with a management team, it's essential to approach the situation with an open mind and a willingness to change perspectives based on new information. In the case of underperforming companies, changes such as aligning non-executive directors with shareholders and implementing cost savings programs can help rebuild trust. The rise of passive investing and quantitative trading presents both opportunities and challenges for active investors, and the impact of these trends on the market depends on various factors. Private equity ownership can also have benefits for companies, despite concerns about debt loading. Overall, effective communication, transparency, and a long-term perspective are key for building trust and achieving success in the investment world.
UK market outlook: Despite challenges, the UK market holds value in individual companies and careful board consideration can unlock that value. Gold is a preferred investment over Bitcoin due to its intrinsic value and historical significance as a currency.
The speaker is bullish on the UK market despite its challenges with productivity, political risks, and regulation. He believes that there is value to be found in individual UK companies and that boards need to carefully consider how to unlock that value. Regarding investment choices, he prefers gold over Bitcoin, viewing gold as a real asset with intrinsic value due to its historical significance and use as a currency underpinning major global economies. Bitcoin, on the other hand, he sees as a speculative asset without fundamental value. If given the choice of holding only one asset class for a decade, he would opt for equities.