The next two charts illustrate recent trends in the UK equity market, highlighting a sustained period of strength in the FTSE All-Share Index despite relatively short periods of fluctuation around events such as the Brexit vote and the UK election.
Exhibit 6: FTSE All-Share Index (total return)
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Exhibit 7: FTSE100 Implied Volatility Index
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Source: Thomson Datastream
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Source: Thomson Datastream
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Exhibit 6: FTSE All-Share Index (total return)
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Source: Thomson Datastream
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Exhibit 7: FTSE100 Implied Volatility Index
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Source: Thomson Datastream
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This is echoed in the Volatility Index, which has generally followed a downward trend since the Brexit vote, interrupted only briefly by the outcome of the UK election.
These positive trends could be attributed to the resilience of the UK and US economies together with signs of improvement in Europe and continuing supportive policies from central banks. This seems to have encouraged investors to look through a range of geopolitical developments that might have been expected to unsettle markets more noticeably. The relatively calm equity market environment in turn appears to have encouraged greater activity levels among retail investors from H216 onwards.
London Stock Exchange retail investor trading volumes are no longer published, but we have used data for retail equity fund sales (to June) from the Investment Association together with the Lloyds Bank Index for UK shares (to August) to give an indication of trends in retail investor confidence. Exhibit 8 shows how net retail equity fund sales were in negative territory last year, reflecting the effect of the EU membership referendum. This followed three years of historically strong sales (the 10-year average to end 2016 was net sales of £6bn). Looking at the shorter-term trend in Exhibit 9, the move from equity fund outflows to inflows is evident but has shown monthly variability, as might be expected. Investment sentiment towards UK equities has shown a clear improvement from the recent low but does appear to have shown some cooling.
Exhibit 8:Retail equity fund net sales from 2012
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Exhibit 9:Fund sales and investor sentiment index
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Source: Investment Association
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Source: Investment Association, Lloyds Bank
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Exhibit 8:Retail equity fund net sales from 2012
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Source: Investment Association
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Exhibit 9:Fund sales and investor sentiment index
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Source: Investment Association, Lloyds Bank
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This broadly fits with Share’s own experience with its clients, where it reports that strong activity levels have carried on beyond the half year end, subject to a normal seasonal slowdown. It remains to be seen whether retail investor activity will resume at a higher level following the holiday season. There are certainly sufficient uncertainties, both economic and geopolitical, to prompt renewed volatility, but for the moment the market has remained calm, potentially creating a favourable background for the trading commission element of Share’s revenue.
Beyond fluctuations in the market background, Share’s fortunes are likely to be dependent on industry developments such as changes in competitive behaviour and consolidation, while Share’s implementation of its own strategic priorities, outlined earlier, including its digital transformation and partnership/acquisition, will also be key.
In terms of the competitive environment, the main recent change has been the acquisition of TD Direct Investing by Interactive Investor. Announced in October 2016, this was completed in June 2017, creating a business with total AUA of £21bn and more than 300,000 customer relationships. This makes it second in size to, although still some way behind, Hargreaves Lansdown (£79.2bn, 954,000 accounts). So far, announcements about changes in the combined group are limited, although a new CEO was appointed at Interactive Investor in March (previously a non-executive director at the company from 2015). The merger is also reported to result in a potential change of SIPP administrator for TD Direct Investing customers (AJ Bell currently). Of particular interest from a Share perspective will be whether the existing Interactive Investor pricing model is adopted for the enlarged business (as would seem logical). Interactive Investor follows a fixed fee approach, similar to Share’s, so this would seem likely to encourage retention, although the impact on individual customers will depend on portfolio size and dealing frequency. The implementation of any merger involving migration to new systems can be disruptive for customers so there could be an opportunity for Share to gain from any fall out, but on a longer view the enlarged platform should have scale advantages. These could result in greater profitability or be used to fund increased marketing or more aggressive pricing, with the latter options clearly being less favourable for Share.
Encouragingly, as shown earlier, Share has been gaining market share and, with an established competitive pricing model and a programme of work to upgrade systems and improve website and app customer interfaces, should be well placed to extend these gains. Further partnership deals or acquisitions could accelerate growth and there is more benefit to come from existing partnerships. As an example, the Computershare UK company nominee share service now has 28 company clients compared with 25 in August last year (see Exhibit 10).
Exhibit 10: Computershare UK company nominee share service clients
Arris International |
GroupeFnac |
Orange (France Telecom) |
Standard Chartered |
Aviva |
International Airlines Group |
Perrigo |
Steris |
Ball Corporation |
Janus Henderson Group |
Perseus Mining |
SuperGroup |
Barclays Contingent Value Rights |
Liberty Global (Virgin Media) |
Prothena Corporation |
Thomson Reuters |
Colfax |
Matra Petroleum |
Rio Tinto |
Uniper |
E.On |
Mondelez International |
Royal Bank of Scotland |
Vodafone Group |
Groupe Eurotunnel |
Myraid Group |
South32 |
XL Group |
The regulatory focus on transparency of costs for retail investors combined with the expected growth in the number of self-directed investors would seem to fit well with Share’s offering on a longer view, while the FCA work on investment platforms is focused on areas such as complex charging structures and obstacles to competition, which do not appear to pose a particular concern for the company. On a shorter view Share does note that regulatory changes including MiFID 2 and General Data Protection Regulations will involve some costs to adjust the way in which data is held and communicating with investors.
In summary, there are the usual uncertainties relating to the equity market background, but for the moment activity levels remain relatively strong. More strategically successful delivery of the digital transformation will be key for Share, while partnerships and acquisitions of books of business have the potential to enhance growth further.