Investors’ love of the familiar may be dangerous

November 8, 2013 7:07 pm

Investors’ love of the familiar may be dangerous

By Jonathan Eley

Why did the Royal Mail flotation capture the public imagination in the way it did? The pricing was certainly attractive, the dividends were appealing and the marketing was persuasive – but a new study suggests that brand familiarity was a big factor. When it comes to investing, familiarity breeds fondness, according to research carried out by Investec Wealth & Investment. The wealth manager questioned more than 2,000 people with a propensity to invest and found that over half were more likely to buy shares in well-known companies. A similar proportion said they would continue to hold such shares even if they performed poorly.“With Royal Mail, there was the novelty of a state-owned company coming to market for the first time. It’s been a while since there was a deal of this size and it was pushed quite hard to retail investors,” said Guy Ellison, head of UK equity research. But he is convinced that the ubiquity and heritage of the brand played a big part too.

The tendency to stick with recognisable brands is evident on the share registers of other large companies. Mr Ellison noted that just 9 per cent of shareholders inIMI, an industrial conglomerate, are individual investors – even though the company’s shares have returned 59 per cent over the past three years. By contrast, 30 per cent of Marks and Spencer’s shareholders are individuals. Its shares have returned only 35 per cent over the same period.

There are also high levels of retail ownership at banks, privatised utilities and oil companies. Mr Ellison said this was likely to mean that individuals are overexposed to certain consumer-facing sectors such as food and general retail, telecoms, utilities and banks – and are ignoring large parts of the market. “We looked at stocks in the FTSE 100 that we felt our mothers would have heard of,” he said. “They accounted for just 40 per cent of the index.”

Investec’s research also suggested that a fifth of investors hung on to shares they had inherited, while shareholder perks were a factor for 13 per cent – even though such freebies are less generous and less widely offered than they once were.

However, one tendency is likely to have served retail investors well this year. Almost a third of respondents in the Investec survey said they would be more likely to hold on to shares if they had bought them as a new listing. Separate analysis by Deloitte has shown that the average main-market listing this year has returned 30.5 per cent – against an average 4.9 per cent increase in the FTSE 100.

Royal Mail was a big contributor to that, but the biggest gainer has been Crest Nicholson, the housebuilder that floated in February and whose shares have risen 75 per cent since. Another notable (if low-profile) success isHellermann Tyton, a company that supplies products for fastening and identifying cables. Its shares have risen 61 per cent since April.