ShareSoc's Response to Patient Capital Review

On 1st August 2017 H.M. Treasury launched a consultation on the subject of financing growth in innovative firms (a.k.a. The Patient Capital Review), which can be found here. ShareSoc and UKSA submitted a joint response to this consultation on 22nd September: ShareSoc -UKSA Patient Capital Patient Capital Review – FINAL VERSION 20170924

Our response included the following comments:

Individual shareholders are the archetypal long-term investors. They tend to invest for retirement, to fund care in later life and to pass on wealth to future generations, as well as for growth and income.
The FCA Asset Management Market Study has highlighted the high fees (and other charges and forms of remuneration) and the anti-competitive behaviour that occurs in this industry. This effectively increases the cost of capital for innovative growth firms and reduces the supply of investor capital. Walker and Kay also identified this issue. Sorting out the excesses of the financial services industry is proving difficult.
The banks’ behaviour since the 2007/08 financial crisis, when they squeezed their customers, withdrew facilities and demanded much higher and more onerous terms has resulted in a huge decrease in the confidence of their customers in the banks . This will take a very long-term to correct.
The taxation treatment of debt versus equity is not equal. Interest on debt is tax-deductible, whereas payments of dividends to shareholders come out of after-tax profits.
As a consequence of points 3 and 4 above, many companies take on debt and have a very short-term orientation.
Capital gains tax has been subject to a huge number of changes over the past 40 years. Government should not expect a long-term perspective from companies and their owners if it keeps changing the rules. In future, Government should only make changes infrequently and only when they are clearly necessary. Presently, there are two main issues:
1. Capital gains tax taper relief over 10 years should be reintroduced. The idea that the longer you hold an investment the lower the tax rate will be a huge factor in increasing long-term thinking. The removal of this taper relief (and prior to that, its reduction from 10 years to a shorter period) has been instrumental in stimulating a short-term focus and culture.
2. Capital gains tax for individuals is assessed on each individual investment , so if an investor wishes to take a profit which is then reinvested in another growth or innovative company, the investors’ capital is reduced by a taxation charge. The investor has not at this stage had access to his capital to spend it, so it is illogical to tax him or her at this time. This contrasts with investments held in an investment trust, where no capital gains tax is levied on gains within the trust; only on amounts that are taken out of the trust.
We, in Britain, need to create a culture of long-term thinking. Patient capital is needed. We need a culture whereby we think about accumulating wealth gradually. The get rich quick culture of the early 2000s served to create a large social imbalance.
The UK markets give lower valuations than US markets to growth companies and innovative companies. This creates an opportunity for US based companies to acquire UK companies cheaply. This is one reason why the UK has failed to produce large successful innovative growth companies on the same scale as the US.
We can see no representative of individual investors on your steering committee. This is a shameful major omission, and is evidence of the way in which individual investors continue to be ignored and underestimated. Direct individual investors make up 12% of the UK stock market, and with indirect individual investors via funds represent 30%. Your steering committee comprises representatives of fund managers rather than underlying asset owners. We note also that successful ‘hands-on’ entrepreneurs such as Luke Johnson and James Dyson are not represented on your panel.
The current VCT tax reliefs are justified by creating incentives to invest. There is no evidence of excessive profits for individuals investing in VCTs. The VCT regime seems to be working satisfactorily. Government should resist the temptations to significantly change something which is working. (Minor changes to stop abuse should be implemented, but only after careful consideration of other consequences.)

Mark Bentley

Director

Post Date: September 25, 2017

Group description:	Our group is interested in sustainable investing and our goal is to identify and evaluate businesses that will thrive through innovation and their transition to a ‘One Planet Economy’. By leveraging the skills of group members, we aim to deeply understand these businesses, particularly focusing on how they develop long-term valuable benefits for their customers. Each year, we plan to evaluate around seven businesses to identify opportunities where our valuation exceeds the market price. A successful outcome is defined as achieving a compound annual growth rate (CAGR), including dividends, of 10% over a decade.
Meeting Type/Venue:	Meetings are in-person in a pub near to Waterloo station in London.
Meeting Frequency/Timing:	Meetings are bi-monthly on a Monday from 10:45am to 4:30pm. Members are expected to also pay for their own lunch which secures the group free use of a private room in the pub. The cost is expected to be £35-40 per person, per meeting, in addition to your SIGnet membership fee.

Group description:	SIGnet Taunton is a new group with around 10 keen members at present, with a range of investment styles and experience. We welcome new members.
Meeting Type/Venue:	In person meetings at a golf club near to the centre of Taunton.
Meeting Frequency/Timing:	We meet on the first Monday of every month at a golf club near to the centre of Taunton, 11am until 3pm with a lunch break.

Group description:	An online group for those who are new to investing, or have only been investing for a few years. Including topics such as: – What is a share or a bond, why and how to buy them. – Comparing funds, unit trusts, Investment trusts and exchange traded funds. – Portfolio management and diversification. – ISAs, pensions, SIPPS and how to save tax. – How terms such as PE ratio and dividend yield are used to value a share. – How to use technical analysis or charting.
Meeting Type/Venue:	Online using Zoom.
Meeting Frequency/Timing:	Meetings are usually held on the last Monday of the month at 7:00pm.

Group description:	An online group for those who already have some experience in investing. Covering topics such as finding companies to invest in, financial statements and ratios, valuation / margin of safety, analysis of companies and investment trusts and exchange traded funds.
Meeting Type/Venue:	Online using Zoom.
Meeting Frequency/Timing:	Meetings are usually held on the last Wednesday of the month at 7:00pm.

Group description:	The Equity Income Group welcomes investors of all levels of experience, from beginners to advanced. The focus of meetings is on dividend paying Investment Trusts, though there is also discussion around individual shares.
Meeting Type/Venue:	Meetings are held online.
Meeting Frequency/Timing:	Meetings are held every 6 weeks on a weekday between 7 and 8:30pm.

ShareSoc’s Response to Patient Capital Review

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Group description:	A welcoming group open to all types of investors. Typical meeting content is to have a deep dive presentation on a topic selected by the participants and a session on buy/ sell/ key lessons learnt last month.
Meeting Type/Venue:	In person at a friendly pub close to Piccadilly Circus
Meeting Frequency/Timing:	Monthly during the evening on the first Wednesday of the month.

Group description:	Our group is a broad church that contains investors of varying experience. Our members’ backgrounds are diverse and include corporate banking, engineering, teaching and the leisure industry. We generally pick a discussion topic for every meeting, e.g. housebuilders or the defence industry, and members are invited to research and discuss different aspects or companies within that industry. We also discuss stocks and investment trusts that we have bought, sold or are interested in and the reasons behind our decisions, and try to make sense of the ever changing investment environment. Discussions are robust and challenging but we are a friendly and approachable group who welcome investors of all levels – we just ask that you contribute, at whatever level you can.
Meeting Type/Venue:	Our meetings are held in a private room at a nice pub near to South Ealing tube station (Piccadilly Line), not far from Ealing Broadway (District, Central and Elizabeth Line).
Meeting Frequency/Timing:	We meet every 2 months, usually on a Wednesday morning at 11am.

Group description:	All levels of experience welcome. A typical meeting agenda includes: – Macro Environment – Trades: Members review existing positions and identify securities with promising TA entry patterns or setups and with suitable risk/reward. Any security, long, short, futures, options may be considered. The convener takes actual positions in trades and maintains his own detailed ledger, accurately measuring performance of individual securities and cumulative activity. Members are notified by e-mail prior to the entries or exits that are decided upon. Following each meeting an updated copy of the ledger is circulated together with the next meeting agenda. Members may wish to maintain similar ledgers of their own but there is no obligation to do so. – Technical Analysis: Techniques and systems used in trades. Members can request discussion of particular aspects of TA.
Meeting Type/Venue:	Online via Zoom
Meeting Frequency/Timing:	The first Tuesday of every month from 7 to 9pm

Group description:	Open to all investors / people with an interest in investing. Typical meeting will involve members talking about recent purchases, successes, failures and possible future purchases. Also with occasional visiting speakers or members making presentations on a topic of interest.
Meeting Type/Venue:	We aim to meet on the last Tuesday of each month in a private room at a pub in Playhatch. Start time 7pm with members encouraged to meet up around 6pm for a bite to eat / drink before hand, if their diaries allow.
Meeting Frequency/Timing:	7pm on the last Tuesday of the month. Meetings likely to last about two hours but with informal ‘overspill’ before / after.