UK equites – Feature


“We believe that UK equities currently offer some of the high- est potential for total returns over the next decade,” Ashby says. But pension funds are still treading cautiously, as Ballard explains: “For exceptional returns there is a need for exceptional market events. These occur around unpredicted tail events, events which we, as long-term investors and with a responsibil- ity for ultimately looking after the assets of our pensioners and future pensioners, hope are not going to occur in the near fu- ture. We would however argue that the UK has the potential to deliver attractive equity returns, in absolute and relative terms. “It is an unloved, under-appreciated market where headwinds are abating and yet expectations and prices are still low.” But he points out the broad market consensus expectations are only for 2% to 3% earnings growth next year. This stands in stark contrast to global equities, for example, the MSCI World, where expectations are for earnings to grow at closer to 10%. This is despite the FTSE100 generating near 80% of its reve- nue overseas and having grown its earnings by roughly 9% per annum during the past 20 years. Pension consultants remain cautious too. Gill at XPS Pensions says: “The UK has lagged global [equity] markets materially for five to 10 years and has caught up a bit over the past three years. But it wouldn’t be a reason to take a punt.” Elaine Torry at Hymans Robertson doesn’t expect a material reversal in the trend for schemes to diversify geographically. “Whilst the attractiveness of the UK market has arguably improved over the last 12 months, it remains a concentrated market by sector and issuer [with the latter being heavily influ- enced by global parents] and so is something that would re- quire careful consideration if a meaningful increase was to be made to a scheme’s UK equity allocation. “Ultimately, like all other asset classes, the allocation to any specific region for any asset class, including equities, must be considered in the context of each individual scheme’s wider investment asset allocation and needs. There is no ‘one-size fits all’,” she adds.


To be clear, the FTSE100 is not expensive.


Graham Ashby, Schroders


POSSIBLE PENSION BOOST TO AIM STOCKS


In July, Jeremy Hunt, the Chancellor of the Exchequer, delivered his first Mansion House speech, announcing measures designed to unlock pension investment in unlisted or private companies. The intention is to incen- tivise companies to start-up and then grow in the UK. Outlined in the reforms was an agreement by nine domestic pension providers to assign 5% of their default funds to “unlisted equities” by 2030. But investors are still waiting to see whether the agreed allocation includes not just private equity, but stocks listed on London’s Alternative Investment Market (AIM), which are quoted, but technically unlisted as it was created to help smaller companies to access capital. “Having traded on a significant premium for many years, AIM-listed shares are beginning to look interest- ing,” Schroders’ Graham Ashby says, adding that the FTSE AIM All-Share trades on a prospective price-to- earnings ratio of 8.5, making it look good value. Some professionals say boosting UK pension fund’s exposure to earlier stage, high-growth companies is uncertain to have an immediate impact on the main market of the London Stock Exchange or bring positive drivers for AIM. Nevertheless, Odyssean Investment Trust’s Stuart Wid- dowson says: “If AIM stocks are included, I expect they will re-rate materially on the back of new buying. Liquid- ity is limited and there is a shortage of good quality decent sized AIM stocks.” He also says if this happens, it is likely to be a catalyst for more new companies to list in London. But nothing is certain with AIM. “Individual share own- ership of AIM-listed stocks of 24% is double that of the FTSE All-Share due to inheritance tax advantages,” Ashby says. Business property relief is an extremely valuable relief for individuals who invest in qualifying AIM companies because it can provide exemption from inheritance tax. But this tax advantage may disappear if the Labour Party comes into power, or if Rishi Sunak follows up on his rumoured plans to abolish inheritance tax.


Issue 127 | October 2023 | portfolio institutional | 41


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