To a global equity fund manager, the question of which stock exchange a company lists on is a bit like where you look for Black Skimmer birds. For most of us, within reason, it does not matter.
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I was once among a pack of transfixed twitchers watching Black Skimmers – beautiful tern-like birds – flying over the sea off the Florida coast, their long colourful beaks skimming through the water, scooping up small fish swimming too near the surface. It was another memorable tick on my global bird list.
Another Brit beside me suddenly got a text message, dropped his binoculars and rushed off. Three days later, he posted an update online that he had raced to Miami, flown to Gatwick and reached the Scilly Isles in time to tick off on his separate UK list a bird rarely sighted in these parts. It was a Black Skimmer.
To a global equity fund manager, the question of which stock exchange a company lists on is a bit like where you look for Black Skimmers. For most of us, within reason, it does not matter.
The “within reason” bit is about listing rules. Each stock exchange around the world requires listed companies to make certain disclosures and meet particular standards of governance. Some jurisdictions are better than others.
The recent news that China is discouraging companies from using the world’s leading accounting firms reinforces concerns I have expressed before over companies listed there. Investors rely on high-quality accounting standards to enable informed decision-making. Similarly, plans to increase Chinese Communist party representation on boards should concern investors.
It is reported that the decision by Arm, the UK-based chip developer, to float in New York is to avoid London’s “connected party rules”. These are designed to protect minority investors from directors voting on transactions from which they may benefit or have conflicts of interest. Under UK rules, companies must gain investor approval for such transactions, whereas in the US they only need to report them.
The listing of Arm is unusual as it is not a young company coming to the market to raise capital but a mature company being sold by its parent, Japan’s SoftBank. Frankly, if SoftBank is listing in the US for disclosure reasons, investors should want to know as much as possible about financial transactions between SoftBank and Arm. In most circumstances I am comfortable with the rules in New York and London.
One common argument for companies choosing Wall Street over London is valuations. Much has been said about the widening discount on UK shares relative to global peers since 2016. Share prices matter, particularly for smaller companies, as the market capitalisation of the business (its worth in the marketplace) may influence how much it may borrow to invest.
Remuneration packages are also often tied to share prices. It can be demotivating for shareholders and management if a general downer on a market means improvements made by a company go unrewarded.
But evidence of this is not as conclusive as sometimes suggested. Oil shares, for example, are said to trade at higher valuations in the US. Using headline measures, ExxonMobil yields 3.2%, while BP yields 3.9% and Shell 3.7%. But Exxon has a distinctly superior long-term financial record.
The UK has few listed technology companies, but one example is accounting software company Sage, on 30 times earnings. US counterpart Intuit is on 60 times earnings. However, US companies state their earnings under GAAP (Generally Accepted Accounting Principles) that require goodwill to be written off. This means the earnings often look low compared to the underlying cash flows. Roughly speaking, Intuit trades on a multiple of 3.6 times cash flow and Sage on 4.4 times — so a much more modest difference, perhaps explained by the superior performance of the US company.
What does matter?
More important than where a company lists is where it does business. The two are not the same. While the funds I manage have no Shanghai-listed shares, they do have a 10% exposure to the Chinese economy through the underlying sales of Louis Vuitton, the French luxury group, PerkinElmer, the US laboratory testing company, and other holdings.
For funds that invest in one country or region, such as UK growth or income unit trusts, this is a little different. They are obliged to have a geographical focus. But many of these funds allow their managers to invest an amount outside the UK — sometimes as much as 20%. This may help them achieve their investment objectives; it also means they do not have to sell shares if a company relists overseas.
Is the City dying?
While being generally neutral on which developed market a company lists on, I am concerned about the health of the UK market. More serious than a thin drift of companies to Wall Street, which may prove to be cyclical, is the fall in overall numbers of companies listed here.
According to Statista, there were over 2,400 companies listed in the UK in 2015. Today there are fewer than 2,000. Some companies have gone bankrupt, some have been taken over, but many have gone private.
This benefits shareholders initially if they receive a premium for their shares, but it is a short-term gain. Management may prefer going private because their pay arrangements are no longer public and they have to report performance less frequently. Private buyers enjoy other benefits – they can raise the debt levels of any owned company so that it pays less corporation tax (interest on debt being a deduction from taxable profit).
A reduced number of companies listed in London matters for investors in various ways. A shrunk investment universe can impair opportunities. And it can concentrate risk. The UK index is dominated by oil and mining companies, pharmaceuticals and banks. This is not a bad mixture and certainly offers a set of companies with global reach. But it is rather lopsided for those holding a FTSE 100 index fund rather than an actively managed UK income or growth fund, where managers would try to get a better balance of stocks and sectors.
Another worry from the perspective of the UK economy is whether young companies can list and raise equity capital for growth here. Do UK rules present a hurdle for smaller businesses looking to float – requiring information of little value to investors and so unnecessary?
Behind the fall in UK company listings undoubtedly lies the decline in the market of investment from UK pension schemes. Rules requiring companies to hold pension deficits on their balance sheets have encouraged them to move pension funds into bonds and, worse, liability-driven investment funds, whose merits are very dubious. The scale of pension funds backing British IPOs seems hugely diminished.
I have been surprised at the strength of reaction to companies like ARM favouring New York over London, but if it prompts wider debate about the health of the UK listing regime and markets generally and leads to sensible changes it could be good for the economy and investors.
This article originally appeared in the FT.