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Diversifying Investment Flows
BURNHAM MUST TACKLE FLOW OF UK INVESTMENT TOWARDS US TECH TO BOOST DOMESTIC GROWTH, SAYS INVESTMENT THINK-TANK
A new report from investment systems think-tank, New Capital Consensus, has claimed that the incoming UK administration must stem the flow of UK pension capital towards US tech stocks and the so-called ‘Magnificent 7’ in order to address its anaemic growth. The report points out as an example that, if a UK DC pension fund is invested in the MSCI World Index, it funnels more money to Apple Inc (5.5%) than the whole of the UK economy (3.8%) on any given day.
Entitled ‘Diversifying Investment Flows’, the report synthesises a series of cross-industry workshops and diagnoses a structural failure within the UK investment system. It finds that national savings are being systematically routed into overseas, predominantly US-based, securities and unproductive secondary markets - at the expense of domestic infrastructure, housing and energy projects.
New Capital Consensus warns that the UK’s £6.1 trillion pool of private investment capital has been caught in an "overseas leak," where savings are systematically funneled into US tech-dominated indices. This herding into a handful of US Magnificent Seven tech giants, which now account for 22.4% of the global index, creates a systemic risk for UK savers while simultaneously starving the UK economy of the primary investment needed for growth.
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New Capital Consensus Policy Director, Dan Hedley, said: “The recent SpaceX IPO has highlighted the fact that index composition is now essentially setting UK retirement policy for UK savers. Nasdaq’s fast-entry rule pulled SpaceX into the index before the market had time to price it properly, and the mechanical consequence of how our DC pensions are invested is that roughly $17.7bn of passive investment will be conscripted into the IPO without pensioners knowledge. The US already massively outweighs the UK in these indices. With $4tn worth of new US-tech IPOs coming down the pipeline, this is likely to get even worse. The UK’s capital flight is not merely a matter of global diversification; it is actively damaging the country’s own innovative ecosystem. Our report highlights how high US valuations, fueled by passive index flows, enable US firms to buy up fledgling UK businesses before they can scale.” |
Furthermore, the report finds that what is often celebrated as market activity is largely an illusion of productivity; between 60% and 75% of equity market volume is now algorithmic secondary trading, which provides a market function of price discovery but fails to reach the balance sheets of real-economy firms.
To break the cycle of UK to US capital flows, the primary policy recommendation of the report is the introduction of tax disincentives designed to out-incentivise passive indexing. The think-tank’s initial proposal would include a 10% DC exit tax on accumulated gains for funds that fail to maintain a 30% allocation to UK productive assets, paired with dividend tax relief for funds that hold at least 10% in UK regional productive assets. NCC argues that while tax is the strongest lever that can be pulled to incentivise domestic re-allocation, other levers like disclosure and mandate reform are necessary to break the inertia.
The report suggests this could include any company whose capital expenditure and R&D exceeds its shareholder distributions (dividends and buybacks). This targets a specific distribution culture flaw where FTSE 100 firms currently pay out approximately 60% of earnings to shareholders compared to just 30% for their US S&P 500 counterparts, but the report also invites the government and regulators to reflect on how they can help steer the industry to build a consensus on this definition.
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Ashok Gupta, Director of New Capital Consensus, said: “This is not about ‘domesticating UK money,’ it is more about ‘stop sending all our money to the US and not concentrating it in 7 high-risk US tech giants.’ UK savers want to see their money improving the areas they will most likely retire in, but this just isn’t happening. If the new administration wants to get to grips with regional development and get our economy growing again, it must address both US-dominated overseas flows and unproductive secondary trading. We believe that can be achieved in-part through tax disincentives. But the system requires multiple redesign principles that perform in concert, including rethinking benchmark construction, changing how funds are automatically invested by default, and greater transparency over how and where our pensions are invested. The report outlines how they can start to do that.” |
