ALEX BRUMMER: Investors who shunned UK

The names of UK life sciences pioneers Abcam, Instem and Dechra Pharmaceuticals may not be very familiar.

Yet each of the three listed companies – antibody supplier Abcam, pharma software innovator Instem and veterinary drugs maker Dechra – have been, or are being, swallowed by bigger overseas competitors.

They are precisely the kind of firms, which given a more vibrant and liquid London stock market, potentially could have developed into the next GlaxoSmithKline or Smith & Nephew.

Instead of inventive British firms expanding organically or through bold acquisitions, they have become sitting ducks, easily absorbed by more wealthy foreign predators.

Some of the blame for this rests with flaccid boards of directors who raise the white flag and head off into the sunset, clutching fat cheques for automatically vested share options. The fundamental reasons for the decline in the cult of UK equity run much deeper than that.

Time for reflection?: Britain has an investment community hung up on avoiding risk and in thrall to corporate governance and short-term returns

Share registers have changed dramatically with pension funds and long-term investors barely visible. The spirit of adventure and ambition, which enabled AstraZeneca, Unilever and Diageo to become global leaders in their respective fields, sadly looks to be lost. Instead, Britain has an investment community hung up on avoiding risk and in thrall to corporate governance and short-term returns.

Chancellor Jeremy Hunt sought to try and reverse declinist tendencies with the Edinburgh reforms at the end of last year.

Eight months on and little of the £75billion of pension fund cash, which he pledged to unleash for riskier innovative investment, has been unlocked.

Similarly, modernisation of stock market listings, proposed by the London Stock Exchange and broadly supported by City regulator the Financial Conduct Authority, has become mired in controversy because of objections from governance mavens. At the turn of the millennium, some 39 per cent of the UK stock market was owned by UK pension funds. That number that has now shockingly fallen to just 4 per cent.

Blame for this market malfunction can be placed at several doors. Veteran City fund manager Richard Buxton, winding up a long career at Schroders and Jupiter, blames over cautious rules imposed by regulators and auditors who have attempted to make pension fund investment risk free.

Certainly the rule makers made it inevitable that pension funds would become squeamish about risks. The origins of the great pensions switch, from equities to shares, date back to the 1990s. The late Robert Maxwell’s raid on the Mirror Group pension fund led to tougher protections for pensioners but put the brakes on risk-taking.

A key incentive for pension funds investment in equities was eliminated by Gordon Brown in 1997 when he effectively abolished the tax breaks on dividends paid into retirement nest eggs. Together, regulatory and tax changes effectively killed Britain’s ‘gold standard’ defined benefit pensions culture.

Big firms such as Boots, with in surplus schemes, made it fashionable to lock in the gains by switching into bonds. The idea that bonds are a safer place was blown out of the water by the liability-driven investment (LDIs) implosion last year. Pension fund advisers turned risk-free assets into derivatives and threatened outcomes for at least 5m present and future retirees.

Regulators and actuaries who supported the bond revolution need to take responsibility for a potential catastrophe. The switch from equity to bonds had diminished London’s status as a share trading and listing powerhouse. Professional markets for currencies, derivatives and the like, still lead the world. But the consequences of great pension fund retreat for UK plc have been dire.

Cadbury might still be British had retirement money not been displaced by hedge funds. Investment in our public utilities would have been a priority rather than dividends distributed to far flung investors.

And Arm Holdings, Britain’s most valued semi-conductor creator, might never have escaped to New York. Hunt fired the starting gun seeking change. It is time pension funds respond to the challenge.

The Barclays Equity Gilt Study – with data reaching back to 1899 – shows over time shares always outperform gilts and indeed continued to do so through Covid-19 and the Russia’s war on Ukraine.

Aversion to risk has been at a heavy cost to the country.