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Retail investors are vital for a thriving stock market. Their drive to prosper through investing in their favourite companies underpins capitalism as we know it today.
Unfortunately, as global equity prices have soared in recent years, many smaller individual investors are shut out of some of the world’s most attractive stocks.
At the time of writing, there are 29 companies listed on the FTSE with share prices at or exceeding £20. Spirax-Sarco, a top engineering group, and AstraZeneca, the pharmaceuticals producer, sit at more than £90 for a single share.
This phenomenon is even more dramatic on the other side of Atlantic, where 96 out of the 100 stocks listed on the NYSE 100 cost more than $25 to purchase, with 39 costing more than $100. A share in Apple costs $178, and a share of defence giant Lockheed Martin costs $418. Warren Buffett’s Berkshire Hathaway is priced at more than $500,000 a share.
None of this is a problem for the large institutions that dominate financial markets or for wealthier savers. But for small retail savers, this is a real barrier. And one that is unnecessary, damaging and unfair.
Consider for a moment the saver of modest means, who diligently puts away £50 a month into equities. At current prices, the ability for this individual to build a suitable, well-diversified portfolio in individual shares is arbitrarily limited.
No matter how strong one’s knowledge of the market or convictions about certain stocks are, if they do not have the capital available they are effectively barred from making certain investments.
Even if our disciplined retail investor manages to save £600 over the course of a year, they would still barely be able to afford a share or two in some of these companies. At this rate, our investor would need to save for more than 800 years to purchase a single stock of Berkshire Hathaway.
Certainly, people in this unenviable position might consider other approaches — notably mutual funds and exchange traded funds, where the resources of investors are pooled.
Many financial advisers recommend this course, as a good way of buying into a diversified portfolio with access to even the largest stocks.
But I and the team at Killik & Co disagree. We have consistently maintained that funds disrupt capitalism. When an individual decides to indirectly invest in equities through a fund, they quickly lose sight of their underlying investments, severing an all-important connection.
Proponents of funds claim they allow investors to build diversified portfolios for minimal costs but neither of these points is entirely truthful. Your fund is only as diversified or cost-efficient as your fund manager chooses it to be. Some funds are under-diversified and others overly so, having been packed full of underperforming stocks. When you also consider the hefty management, performance and platform costs associated with fund investing, you begin to see the issue I have.
There are many reasons why retail investors have become disengaged from investing in individual stocks, including lack of research material and the relentless promotion of funds by fund management groups. Not to mention the time required.
But for those small investors who want to make the effort, one obvious improvement is to allow the holding of fractional shares; that is, slices of an individual stock.
Far from a novel concept, this principle already exists with non-equity securities such as funds, which investors can hold in fractions of units, and gilts, which can be held down to a single penny of nominal value.
Ownership of fractional shares has been growing in popularity of late, with big American technology stocks such as Amazon and Alphabet much in demand. Using platforms such as eToro and Freetrade, investors can purchase fractions of shares in many US- and UK-listed companies.
The ability to hold fractions of shares empowers retail investors, allowing them to build a diversified portfolio while simultaneously rebuilding that connection to the company, which I believe is integral to a flourishing investment community.
But a key obstacle needs to be overcome. HMRC does not permit investors to hold fractional shares in Isas.
Fortunately, chancellor Jeremy Hunt’s announcement last month of plans to reform Isas gives him a golden opportunity to fix the problem.
Stocks and shares Isas are the most efficient and popular investment vehicle available to the public, complete with a generous £20,000 annual tax-free allowance. Outside of their notable tax efficiency, Isas are also simple, allowing investors to hold all their different investments in one easy-to-access tax wrapper.
Consecutive UK governments have often spoken of the importance of savings, but unfortunately words and deeds have seldom aligned.
The failure to allow fractional shares to sit in Isas is a real obstacle for retail investors. It is a block for those looking to enter into the world of investing, preventing many from feeling a connection to some of the most exciting companies.
Even wealthier investors who do have the capital to afford these blue-chip stocks would benefit greatly. Fractional shares would allow these individuals to retain the income that they receive within their Isas and reinvest these smaller sums in their portfolio, via fractional shares. They could then enhance their total return — instead of letting the unproductive cash from dividend income sit unused.
Also, allowing fractional shares in Isas would — at the margin — help grow the total investing base in the UK, making investing in the stock market a viable option to a wider share of the population.
HMRC’s policy needs overturning urgently. Regardless of your political persuasion, a strong base of retail investors can only be seen as a positive for the UK.
Paul Killik is founder and senior executive officer, Killik & Co