Fund managers lament lack of choice in UK stock market

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A growing number of Britain's biggest companies are being taken over by the stock exchange, a move that is hitting local fund managers hard, who fear it will reduce their selection of quality stocks.

According to data from investment bank Peel Hunt, 30 London-listed companies received firm takeover bids worth an average of $1 billion in the first half of this year, compared with 27 bids worth an average of $443 million in the first half of last year.

While this has boosted share prices in the short term, London's failure to sell these shares and attract new offerings to replace them has created a worrying situation for many fund managers whose job it is to buy attractive UK stocks, and the brokers who deal with them.

The UK risks becoming a narrower market, says David Cumming, head of UK equities at Newton, who has been a UK equities manager for more than 40 years. He expects bids for London-listed companies to continue to increase.

He added that more needs to be done to encourage investment in UK stocks to prevent the market from falling into decline.

This month FTSE 100 company Rightmove had a takeover bid rejected by Rupert Murdoch-owned group REA.

FTSE 250 mid-sized companies have also been targeted, with door and window component maker Tyman and telecoms testing group Spirent both being acquired by US-listed companies this year.

Last week, US gold miner AngloGold Ashanti agreed a $1.9 billion deal to acquire gold miner Centamin, a deal that would remove another gold miner from the London Stock Exchange.

Foreign buyers are often attracted to the UK by lower valuations than US companies: the FTSE 100, for example, trades at 15.1 times earnings, compared with 26.8 times for Wall Street's S&P 500.

UK fund managers typically make short-term gains from such acquisitions. According to research by Phil Hunt, the average premium paid by buyers has increased to around 40-60% since the coronavirus pandemic, compared to the long-term average of 30-50%.

A wave of takeover interest has helped the FTSE 100 and Mid 250 indexes outperform Europe's Stoxx 600 over the past six months, and prompted some hedge funds to shy away from short bets on falling UK stocks.

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But for executives looking to recycle cash recovered through acquisitions, there is concern that they will have little choice between existing UK shares or new listed equities.

Michael Nicholson, head of mergers and acquisitions at Phil Hunt, said that without a high volume of IPOs, the overall quality and quantity deteriorates over time, leaving good companies without equivalent replacements in the market.

According to Dealogic, London has had nine IPOs so far this year, compared with 19 for the entire year. There were 119 IPOs in 2014. This year’s IPOs have raised $707 million, down from $972 million last year. Ten years ago, companies raised $27 billion.

Laura Paul, equity income fund manager at Janus Henderson, said given that there were not many companies listed in the UK, it logically meant that the number of listed companies was declining.

She added that she doesn't expect this dynamic to continue in the future, but in the short term it will help highlight the value of the services being offered.

The takeover activity follows companies such as bookmaker Flutter and building materials group CRH moving their primary listings to the US.

According to asset manager Schroders, there were more than 2,700 companies listed on the London Stock Exchange’s main market in 1996, but by the end of 2023 there would be fewer than 1,100. Europe and the US have seen similar trends, but to a lesser extent, as the growth of the private equity industry has allowed companies to remain private for longer.

Policymakers are trying to make London a more attractive place to buy shares through a series of measures.

This includes a plan to encourage pension funds to allocate more capital to UK equities. According to data from investment bank Ondra Partners last year, the amount of money invested in UK listed shares by UK pension and insurance fund investment portfolios has fallen by about half to 4% over the past 20 years.

In July, the Financial Conduct Authority announced a sweeping overhaul of UK listing rules in a bid to revive capital markets.

Many managers are hopeful that the company's exit can be reversed.

James Loewen, UK equity fund manager at JO Hambro Capital Management, said that if this situation continues for five years, it will be a problem, citing the level of takeover activity. That is why we think there will be policy measures to prevent this trend from happening.

Video: How to reboot the UK's capital markets | FT Film

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