Individuals and pension funds missing out on share ownership

Individuals and pension funds missing out on share ownership

UK individuals owned 11.5% of the value of the UK stock market at the end of 2010. This is dramatically down on 1998 but with a positive trend since 2008 when shares have represented good value compared to cash savings.

Written by Trevor Lloyd-Jones on 28 February 2012

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At the end of 2010 the UK stock market was valued at £1,777.5 billion, according to the latest ONS statistics, with a healthy rise of over 50% in share values in two years.

Nevertheless, the data shows that ordinary UK investors missed out on a lot of these gains. Share ownership by British individuals continued a long-term decline compared to overseas investors and some other institutional investors who grew their participation.

Shareholding by individuals up since 2008

The proportion of shares held by individuals has declined since 1963 when individuals owned 54.0% of UK quoted shares in terms of total value. Their percentage holdings reached a low of 10.2% in 2008, however by 31 December 2010 this had risen to 11.5%.

This may reflect the relative strength of equities as an alternative investment compared with low interest rate returns on savings.

Included in individual ownership are shares owned by company directors and those in privatised and demutualised building societies which are still owned by individuals. Many individuals also make investments in ordinary shares through unit trusts. However, holdings via unit trusts that are not quoted companies are not included.

Rest of the world investors owned 41.2% of the value of the UK stock market at the end of 2010, up from 30.7% in 1998. The large increase since 1994 in participation by foreign investors partly reflects the growth in international mergers and acquisitions, and the ease of overseas residents to invest in UK shares. Since 2006 these holdings have levelled out at around 40%.

Other financial institutions held 16.0% of the value of the UK stock market at 31
December 2010, up from 2.7% in 1998.

At the end of 2010, insurance companies held 8.6% and pension funds held 5.1%
by value. These are the lowest percentages since the share ownership survey began in 1963.

Some 44.9% of the shares by value were held in multiple ownership pooled accounts where the beneficial owner is unknown. These have been allocated to sectors using further analysis of share registers by the ONS.

Pension funds spread risk

The proportion of shares held by insurance companies grew from 10.0% in 1963 to a high of 23.6% in 1997. Since this time, insurance companies' holdings have
continued to fall, reaching 8.6% in 2010. This is the lowest recorded percentage of holdings by insurance companies since 1963.

This fall could reflect insurance companies switching from UK equities to alternative investments. It's likely that UK pension funds may also be investing in overseas equities rather than UK shares.

Since the high point of 1992, the proportion of shares held by pension funds has been falling. Fund managers have broadened their portfolios to seek higher returns and to spread risk.

Between 1998 and 2008, it was assumed that 50% of the value of shares held by multiple ownership pooled nominee accounts would have underlying ownership by pension funds. This was based on analysis of share registers in 1997. For 2010 an exercise to update the sector allocations was completed.

This analysis of pooled nominee accounts suggests that now only 7.8% of their holdings are pension funds. This has had a large impact on the results given that over 40% of the value of UK quoted shares is held in pooled accounts.

Consequently, the ONS suggests comparisons in the intermediate years between 1998 and 2010 should be made with caution.

Share prices show sharp movements

Between 1 January 2009 and 31 December 2010 the value of all UK ordinary
shares quoted on the London Stock Exchange increased by £619.7 billion to £1,777.5 billion, an increase in value of 53.4%.

Since the 1980s, UK stock market indicators have generally risen over time. However from 1995 they show much sharper movements reflecting global events. The first sharp rise in the FTSE 100 between 1996 and 1999 was during the 'dot-com bubble'. When the speculative bubble burst the FTSE 100 index fell over the period 2000 to 2003 by around 50%. After this event, the UK stock market increased until the financial crisis began in late 2007.

Subsequently, the FTSE 100 index fell by around 40% before recovering again. The two events of the dot-com bubble and the financial crisis have also meant that the FTSE indices have shown less of an upward trend since 1995.

Positive returns from equities

Trevor Lloyd-Jones, personal finance editor at MoneyVista commented: "These latest figures show some return of individuals to the stock markets since the last crash of 2008. But it seems many investors are still missing out as markets return to a path of higher returns with slightly lower risk.

"Our top tip is to make maximum use of your ISA allowances and be clear what you want to achieve with stocks and how long you intend to hold them for."

Danny Cox, head of advice at Hargreaves Lansdown, said: "With interest rates at record lows some investors are looking to take more risk with some of their capital in search of alternative sources of income. At first glance, focusing on the highest yielding shares could therefore be tempting. A high yield can also be indicative of a low share price. 

"There is also potential for capital growth. Shelter these shares in an ISA and there is no capital gains tax or further income tax to worry about. Yield is therefore just one factor that should be taken into consideration."

Damien Fahy, head of research at Dennehy Weller & Co says if you want to achieve growing income through a long retirement you have to embrace equity income funds. Income investors wanting to achieve long term growing payout to combat inflation will need to move away from an obsession with the day to day moves of the capital value. 

"More importance should be placed on the lack of volatility and relative predictability of income," said Fahy.

"Think of an income portfolio like your heart pumping out blood: the heart continually changes shape as it pumps out a steady stream of blood. The capital value of your income portfolio will also vary from day to day, but there will be a steady flow of growing income."

For registered users MoneyVista allows you to analyse all your accounts, pensions and other assets in one place and see what they would produce in retirement. You can set your budgets and goals for the year ahead. For related information you can access the MoneyVista guide Stocks and shares ISAs explained.

You can also click on 'Build a plan' to start experimenting with your own financial plan. 

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