MARKET COMMENT
Death Of The Private Investor

By Stuart Watson (TMFTiger)
October 21, 2002

Many people would assume that, given the rise of online brokers in the last few years (not to mention sites like the Motley Fool) and the enormous privatisations of the 1980s and 1990s, the UK is no longer a nation of shopkeepers but a nation of shareholders. However, ownership of shares by individuals is in steady decline and has been for a few decades.

Share issues like BT Group (LSE: BT.A) have certainly increased the number of people who own shares. In fact, it is reckoned that around 12m UK individuals own shares. Most of these 12m don't trade actively though and own only a handful of privatisation issues. It's reckoned that just 100,000 or so individuals trade more than 15 times a year.

Although the number of private shareholders has increased, the proportion of the market owned directly by private investors has declined dramatically. According to figures from the Office of National Statistics (pdf file), direct ownership by individuals has slumped from 54% in 1963 to just 20% by 1990. Since then it has continued to fall steadily. The figures for 2001 have just been published and show individuals now own just 14.8% of the market. That's still a significant amount, so stories about companies ignoring private investors due to the high cost of servicing them may be somewhat exaggerated. 

Replacing individuals as the main owners of UK plc are insurance companies, pension funds and foreign shareholders. Insurance companies and pension funds now own some 36% whereas in 1963 they owned just 16%. Unit and investment trusts account for a further 4% of the UK market. Perhaps it would more accurate to say that the method by which individuals invest in the market has changed, with pensions and insurance products now being the preferred vehicle. Foreign shareholders now account for 32% of the market, up from just 7% in 1963.

The survey also looked at techMARK companies. These technology company indices were set up in late 1999 and many of the constituents are among the most widely discussed companies on our boards. Interestingly though, the proportion of individual ownership in high tech companies was almost identical to the wider market. Perhaps most private investors don't go for these high-risk shares despite the anecdotal evidence that suggests otherwise.

The slow death of the private investor is not really a surprise, though. Relatively few people have the time or money to devote to a portfolio of individual shares and the rise of pooled investments reflects that. The best way to invest in the market for the vast majority of the population is likely to be through a cheap index tracker. Sadly, these figures show there are still vast amounts of money in expensive and inflexible alternatives, like with-profit funds.