Pinstripe: Stock market malfunction – Herald Scotland


The functioning of the stock market has changed to such an extent that it is at best useless in terms of benefit to the real economy and possibly actually harmful.

The stock market should be a sensible home for investors who can stand short term volatility in the value of their savings and want to build up wealth to be able to deal with illness and old age as well as pass on to their children. Sometimes people do this by holding shares directly and sometimes they entrust their money to professional managers to invest for them.

As well as buying existing shares, people like you and me used to buy new shares issued by public companies to fund growth and investment. We held our shares for long periods, we were interested in the companies, we felt like owners.

Companies, large and small, joined the stockmarket because it was a natural stage in the evolution of a successful business and they gained from it.

This model, beneficial to companies, investors and the wider economy, has quietly vanished.

Private investors generally no longer have the chance to invest directly in new share issues. In terms of value the great majority of companies which join the stock market are not companies seeking to raise new capital but those who desire replacement capital to pay-out their private equity backers. Often the share prices of these companies, revved up for short term performance by their previous owners, prove disappointing for their new investors.

Even for fund managers, ahead of us individuals in the queue for new shares, the quality and quantity of new public share issues they have access to is declining.

For companies, being listed on the stock market has become much pain and little reward. Ripped off with fees by the City oligopoly; drowning in red tape, intrusive scrutiny and regulation; directors at risk of jail if they make an honest mistake; wondering if it will be their turn next for Dick Turpin and his “shareholder value” posse to turn up demanding money now rather than investment for the future.

Increasingly companies vote with their feet – the numbers of UK companies joining the market is exceeded by those leaving, their places filled by techie hopefuls and rubbish to steer clear of. In Scotland the direction of travel is clear, Bank of Scotland, Hewden Stuart, Goldbergs, Alexander Russell, BPI, Scottish Power, S&N, Thus, Christian Salvesen, Stakis – gone from the stock market and largely not replaced.

Should we care? What should we do?

The trend towards a global stock market which is highly efficient and liquid but only caters properly for companies with values in the billions is probably inevitable and we should think what to do rather than try in vain to stop it.

Companies will increasingly look to alternatives to the stock market in order to fund their growth. Most fund managers will increasingly be exposed as adding less value than their fees and will have both to dramatically lower their costs and show they continue to add real value. Scottish Mortgage Investment Trust is an example of the future, as well as being cost efficient it increasingly takes investments at an earlier stage than flotation; its willingness to invest with conviction and hold for the long term makes it a welcome shareholder for the really good companies who have a choice of financial partner.

For you and me it means we are likely either to live with returns which seem modest compared to those of earlier years or we are going to have to invest in private companies where we act like real owners again. The future is quite bright; but different.

Pinstripe is a senior member of Scotland’s financial services community.

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