Saturday 3 November 2012

The Tail Does Not Wag The Dog

Sometimes it is good to stand back to take in the big picture. 

As readers will know, high-yield dividend shares - bought on the London Stock Exchange (LSE) form a major part of the DIY Income Investor portfolio.

But here are two questions:
  • what proportion of shares is owned by UK individuals?
  • who owns more of these shares: UK pension funds or UK individual investors?
The answers:
  • UK individuals (including nominee accounts) own only 11.5% of UK-quoted shares
  • UK individuals own twice as many shares as UK pensions funds

The data come from the following table, included in the Final Report of the Kay Review (2012) - a review of the workings of the UK financial sector - and shows the ownership of UK-quoted shares.

Regulation of pension and life funds, and the maturity of pension funds, has led both pension trustees and insurers to reduce their exposure to equity markets - as noted in a previous post.

Holdings by pension funds and insurance companies now account for around 20% of the total. The pattern of shareholding is much more fragmented than formerly and the share attributed to non-UK holders is over 40%.

The steady decline in direct ownership of shares by small investors has recently been offset by a rise in the proportion held by employees and (increasingly) directors. However, the decline in direct ownership of shares by individuals has had one significant effect - as described in the report:

"The decline in the role of the individual shareholder has been paralleled by an explosion of intermediation. Between the company and the saver are now interposed registrars, nominees, custodians, asset managers, managers who allocate funds to specialist asset managers, trustees, investment consultants, agents who ‘wrap’ products, retail platforms, distributors and independent financial advisers. Each of these agents must employ its own compliance staff to monitor consistency with regulation, must use the services of its own auditors and lawyers and earn sufficient to remunerate the employees and reward its own investors."

So, individual investors beware - you are in a marked minority in the markets, and in the ownership of the companies themselves. An army of intermediaries is making a living out of you - rather like an infestation of fleas.

You are the wagging tail - quite happy at the moment, I would guess; but the dog could bolt into the undergrowth at any moment.


I am not a financial adviser and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.

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