Investors lured by shares in well-known companies risk missing out on stronger performers
More than half (57%) of investors looking to buy shares over the next 12 months admit to preferring well-known UK brands, such as supermarkets and banks, according to a new study commissioned by Investec Wealth & Investment.
But Investec warns that by opting for household names over lower profile brands, investors risk overlooking the majority of listed companies and failing to build a diversified portfolio that could better suit their investment needs.
According to the survey, almost a third (29%) of investors will only buy well-known companies and 35% feel more confident doing so – despite only around 40% of FTSE 100 constituents arguably being considered household names. Almost half (47%) say they would retain their stake even if the shares performed poorly.
Investec’s analysis of levels of retail share ownership among key FTSE 100 stocks underlines this tendency to back the well-known brands: for example, Marks & Spencer estimates that around 30% of its shares are held by private investors, much larger than the 12% of quoted shares owned directly by UK individuals reported in the Office for National Statistics’ (ONS) most recent analysis of UK share ownership.
Investec’s survey suggests that it is more than the share price alone that motivates investors to keep hold of their stocks. Nearly a third (31%) are more likely to continue holding shares if they bought them as new listings while a fifth (21%) would continue to retain shares they have inherited. Furthermore, one in ten (11%) admitted to holding shares largely because of the perks they offer, such as discounts or vouchers, even though the number of these is diminishing.
The research further revealed that two-fifths (39%) of investors buy shares in a company when they understand what it does, and one in five (20%) say they prefer to invest in firms where they use the products and services.
‘Investors may be missing out on better investments elsewhere’
Guy Ellison, head of UK equity research at Investec Wealth & Investment, says: “It’s understandable that many retail investors will be drawn to companies they know and have heard of, or see regularly on the High Street. However, relatively few leading companies in the UK are household names and by simply focusing on well-known brands, many investors are potentially missing out on superior investment opportunities elsewhere, while leaving themselves vulnerable to an over-concentration in certain sectors which are familiar such as retail, travel and leisure and banking. This latter risk has been highlighted following last June’s referendum on the UK’s membership of the EU, which has contributed to the sharp underperformance of several domestically-focused, and hence ‘familiar’, names.
“Our research underlines how sentimentality can come at a price. Successful investing requires taking a dispassionate view of your holdings and many people find this is better achieved by appointing a professional to do this on their behalf.”
A market-weighted index of the 100 biggest companies by market capitalisation listed on the London Stock Exchange. It is often referred to as “The Footsie”. The index began on 3 January 1984 with a base level of 1000; the highest value reached to date is 6950.6, on 30 December 1999. The index is “weighted” by how the movements of each of the 100 constituents affect the index, so larger companies make more of a difference to the index than smaller ones. To ensure it is a true and accurate representation of the most highly capitalised companies in the UK, just like football’s Premier League, every three months the FTSE 100 “relegates” the bottom three companies in the 100 whose market capitalisation has fallen and “promotes” to the index the three companies whose market capitalisation has grown sufficiently to warrant inclusion. Around 80% of the companies listed on the London Stock Exchange are included in the FTSE 100.