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Share ownership dream shattered

1 Dec 08

The multiple market upsets of the past 15 months have done serious damage to the City’s reputation among small investors

by Angus McCrone

The past year and a half has left serious wear and tear on the UK financial sector’s reputation. The dents and rust holes are visible not just on the innovative, international “new City” of the mid-2000s, but just as much on the “old City” – including its Edinburgh offshoot.

However if bankers, financiers and institutional investors have a serious repair and paint job to do as 2008 draws to a close, then another group – the private client investment industry – finds that it is staring at little more than a pile of scrap.

The cause of individual share ownership has been battered blue by recent events. It had already been weakened this decade by the stock market’s failure to regain its highs of 31 December 1999, and by the competing lure of the property bubble.

In the financial year 2007-08, some £10.4 billion was subscribed to stocks and shares ISAs (Individual Savings Accounts). A big number, perhaps, but small compared with the £25.3 billion subscribed to cash ISAs in the same year, and miles down (despite inflation of at least 25 per cent in that period) on the £16.1 billion subscribed to share ISAs in 1999-2000.

ISAs are only one part of overall private share ownership. Data from Capita in mid-October showed that private shareholders owned only 9.6 per cent of the UK’s listed companies, the lowest figure since before Margaret Thatcher’s privatisations of the 1980s. In 1994, the level was 20 per cent.

The mood music late this year is much bleaker, even, than the numbers. On front page of the website of the UK Shareholders Association, are prominent links for Northern Rock Shareholders Action Group, Bradford & Bingley Shareholders Action Group and UKSA Launches Campaign on Bank Dividends.

Bradford & Bingley had 936,000 individual shareholders at the end of 2007, all of whom will have found their holdings reduced to nought by the nationalisation of September this year. Northern Rock had an estimated 170,000 small shareholders.

Shares in HBOS, the combined Halifax-Bank of Scotland, fell 90 per cent between the middle of 2007 and the end of October 2008, and even then, the company’s future was far from secure. At the end of 2007 1.9m HBOS shareholders owned fewer than 1,000 shares each.

Those millions of private investors have learned a hard lesson from something that conventional wisdom had told them could not happen. The maxims of the 1980s and 1990s were that the way to invest was to buy blue-chip stocks, and hold for the long term. Shares outperform cash and bonds if held long enough, it was said.

In the recession of the early 1990s, some large quoted companies did go bust, but these were mainly at the buccaneering edge of London’s big league – such as British & Commonwealth, Coloroll, Polly Peck and Maxwell Communications. The staple shares held by private investors mostly came through that downturn in good shape.

In the early 2000s, there were a couple of warnings that shareholders could lose almost everything in blue chips, too. Marconi, formerly GEC, was one; British Energy was another. But, in general, individual shareholders hung on to their holdings in the privatisation and demutualisation stocks, in the belief that FTSE100 index shares were safe, if volatile.

Insofar as there was a private investor share craze in this decade, it was in shares listed on the Alternative Investment Market (AIM). But these have performed particularly miserably – the FTSE AIM All-Share Index, from a peak of 1274 in June 2006, slumped to 424 in October this year. Its previous all-time low was 550, in early 2003.

So, private investor confidence is shot. What are the implications? One is that recovery will be slow. In all probability, private investors will miss out on the lion’s share of the next bull market before they pluck up the courage to get involved again.

Another is that the risk premium on individual shares has gone up. Pressure from hedge funds and others for quoted firms to be more aggressive has pushed them into making mistakes that have cost shareholders dear in the medium term.

However one other maxim of the stock market is not dead. In fact, it has been strengthened. It is: “Don’t put all your eggs in one basket”. Individual shares are much riskier than the market as a whole. After the crisis of 2008, Foreign & Colonial Investment Trust and other old-fashioned, well-diversified funds will live to fight again.

It sounds as if there is a marketing opportunity for the Square Mile and Charlotte Square, after all.

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