1.2.2 The rise of the investment funds
In the following video Martin talks to Professor Janette Rutterford about the emergence and development of investment funds.
Institutional investment funds
One of the most striking developments in the financial services industry in recent decades has been the rise of the institutional investment funds. These include the pension funds, unit trusts, open-ended investment companies (OEICs), investment trusts and the funds held by insurance companies.
The aggregate institutional holding of UK shares doubled (from 35 per cent to 70 per cent of total share holdings) between the 1960s and the 2000s. Similarly, holdings of UK government securities (also known as gilts) by institutional investors increased from 25 per cent of the total to 66 per cent over the same time period (Rutterford and Davison, 2007, Table 10.1). By contrast, the same period saw an equally marked fall in the direct holding of such investments by individuals.
Table 1 Institutional investment funds
|Rest of the world||7.0%||53.8%|
|Other financial institutions||11.3%||7.1%|
|Private non-financial companies||5.1%||2.0%|
|Charities, Church etc.||2.1%||1.2%|
Although the privatisation of nationalised industries and the conversion of many building societies into banks in the 1980s and 1990s markedly increased the number of shareholders in the UK – from 3 million in 1979 to 15 million by 1997 (falling back to around 11 million by 2009) – most individual investors only have very small holdings of shares. Consequently, as mentioned above, these developments did not change the sharply downward trend line in the percentage of shares directly held by individuals. The main reason for this is that, during recent decades, individual investors have moved from investing directly in shares and securities to investing indirectly via third parties. One reason for this has been the growth of company pension schemes during this period, with individuals paying into pension funds that, in turn, invest in shares and other investments – in effect, on behalf of the individual contributors.
Another major reason for the shift of investment activity away from direct investments has been tax policy, with certain institutionally organised investments offering a better post-tax return. The tax relief applied to premiums paid to those investing in life assurance policies until March 1984, combined with a relaxed regulatory environment for selling these products, established an environment where sales of policies boomed. Additionally, life assurance products that paid lump sums to the policy-holders on the maturity of the policy (i.e. paid out a return even though the investor had not died) provided a means to enhance retirement funds – particularly for those with inadequate pension arrangements.