S3E4: Investors Need To Take Back Power
In today's capitalism, who truly holds the reins of power? Merryn Somerset Webb is a Senior Bloomberg columnist and former editor of Money Week. In her book Share Power, she argues we, investors, need to take back control of our votes in the companies we own. She also believes that the next decade for investors will be dramatically different to the last.
What you should remember from this episode
If you own shares in a listed company (a public company) you should be able to vote on some of their decisions.
If you’re employed in the UK, you’re almost certainly invested in public companies unless you’ve opted out of your auto-enrollment workplace pension. This is because most company pension funds will invest in public companies.
If you invest in shares via a fund, you own a unit of the fund which then owns the shares. This means most shares today are owned by big funds (and other corporates) rather than people.
In fact, only 13% of shares are owned by people, individually. The rest are owned by funds/corporates.
This means the votes attached to the shares are held in great concentration by a small number of fund managers, which gives those fund managers a lot of power.
For most ordinary people who are shareholders, there are too many companies and decisions to vote on. But Merryn thinks investors might have an opinion on certain decisions in particular companies, like CEOs paying themselves a huge sum, or maybe strategy decisions, or appointments to the Board.
Companies can propose decisions through resolutions. Most of these are fairly boring but you might want to pitch in on some - and Merryn’s wider point is that, as an investor, you have some power over the corporate world.
Merryn views the lack of engagement (between retail investors and big companies) as a threat to capitalism as a whole.
Merryn loves capitalism. She says it’s our natural human state because we’re accumulators, we’re workers, we’re always trying to better ourselves (which is why no other system has worked). And capitalism is also self-correcting.
Over the last decade a lot of UK companies have not gone public, instead they’ve been acquired or been invested in via private equity so they don’t need to raise money by listing on the stock market. This means a lot of the growth in the corporate world hasn’t been ‘listed growth’ so we haven’t been able to participate in that growth.
Merryn thinks this might be about to self correct because private equity flourishes in a low interest rate environment which we’ve now left behind.
The other issue is a lot of companies have been listing later in their lifecycle, after they’ve already done a lot of their growing so we (the public and public markets) don’t benefit as much from their growth.
One of Merry’s interviewees said low interest rates get into all the cracks and now we don’t know what’s going to break. Nice visual that.
She says you’ll probably see a rise in defaults and a correction as we start reallocating capital more efficiently, which is a good thing even though it’s painful.
A guest who Merryn interviewed said that once inflation goes over 8% in a developed economy it takes on average 14 years to bring it back down to the target (the UK target is 2%). And it tends to become extremely volatile, which isn’t good for markets.
Merryn thinks index fund investing is generally a good way to invest, in part because it’s cheap. But she argues for an equal weight index, which means your investment is constantly being rebalanced e.g. so that every company constitutes 1% (if there are 100 companies in the index) rather than favouring a handful of the biggest companies like Apple which can end up dominating. The argument is that if you don’t rebalance, you’re investing more money into what could be ‘expensive’ businesses because their prices are invariably high so you’re not getting value. Plus she thinks you should rebalance frequently because you don’t know when your winners aren’t going to be winners.
Merryn wrote this article on this topic.
She says it’s very hard for stock pickers to outperform the US market because there’s so much money, research, data etc. in it so it’s very difficult to find an edge. Plus the US market has been driven by a small group of companies so people who’ve stock picked outside those companies have invariably failed.
But Merryn says stock pickers have a much better chance outside of the US. In fact, she says that outside the US active funds have outperformed passive.
Merryn says stock pickers can find value (and an edge) in places like India and Japan because there are much fewer analysts pouring over those markets and companies.
Merryn argues that if you think the market is going to run out of momentum, then you might want to consider active funds (picking individual stocks) because they have the skills to pick the winners on an otherwise sinking ship versus index fund investing. She says the more difficult the market is, the more likely it is that an active fund manager will outperform the market - particularly outside of the US. That’s the theory, but she admits she’s also said similar things many times before and been wrong.
How would you pick an active fund manager? Merryn suggests starting with the cost but then you need to make some general decisions like about the region(s) you want to be invested in, the industries etc. Then look at past performance of course, including versus the market (index funds) over as many years as you can. Then you need to analyse their strategy, valuation technique etc. to see if you rate how they work. This isn’t easy stuff. Plus Merryn recommends having multiple active funds so you’re diversified across fund managers. And you need to check on their performance every 6 months. So it’s a meaningful amount of work.
Speaking of, as ever, please do your own homework.
