NO 249 – NOVEMBER 2013

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WFE Focus
WHO OWNS EUROPEAN QUOTED SHARES?
DIDIER DAVYDOFF
Managing Director,
INSEAD OEE Data Services (IODS)

There is a broad literature on micro aspects of equity ownership, focusing especially on features such as the distribution of direct and indirect ownership of equities by household population quintiles or broken down according to socio-demographic characteristics of the population. This line of research is based on survey data produced by pollsters or official offices of statistics.

However understanding the long-term trends in shareholding structure is equally important to stock exchanges for offering services and regulating the market in a manner that is tailored to the needs of investors. Such research is strongly affected by the nature and availability of underlying databases. These are represented basically by the System of National Accounts (SNA) and its sub-systems such as the Balance of Payments Statistics. Since the System of National Accounts was first established in the early fifties under the United Nations Organizations and with the contribution of many important international organizations, such as the IMF, the OECD and, more recently, Eurostat, statistics have undergone successive waves of developments and refinements. In Europe, Eurostat provides figures for all 28 members of the European Union (EU).

EU national financial accounts raise two difficulties:

  • EU countries should transmit data from 1995 onwards only. Several national Offices of Statistics or Central Banks publish financial accounts for the years prior to 1995 but this coverage is neither exhaustive nor consistent in terms of methodology and time period.
  • The concept of “Rest of the world” in national accounts is composed of any non-national unit. It does not consider European (other than national) investors as domestic investors. But the official definition of the “rest of the world” does not correctly reflect recent trends, especially the rise of round-trip funds which are officially domiciled in Luxembourg or Ireland and subscribed by investors in other European countries, including investors indirectly buying shares issued by companies located in their own country. National accounts are based on national categories and they do not use the concept of “European investor”.

To fill these gaps and at the request of the European Commission and the Financial Services User Group (FSUG1), we have built a database on the share ownership structure of listed European corporations. For that purpose, we have combined several data sources, including National Financial Accounts, Portfolio Investments survey data disclosed by IMF, data on institutional investors compiled by the OECD, statistics on stock exchange capitalization and long time series built by national statisticians. Despite these extensive sources, we had to estimate some figures, due to missing data or inconsistent methodologies used in the past. However, the output of our data processing is sufficiently representative to identify significant trends.

The database is innovative for two reasons:

  • We propose long time series covering the years 1975 to 2012. We also propose an estimation for 1969, based on two countries only (the United Kingdom and Germany2)
  • We propose a first estimation based on a new classification of investors where EU investors, rather than national investors are considered as domestic. Such estimation has been possible for the years 2001 to 2011. Moreover, starting from 1990, we have reallocated pan-European investment funds to domestic investors rather than foreign investors.

    understanding the long-term trends in shareholding structure is equally important to stock exchanges for offering services and regulating the market in a manner that is tailored to the needs of investors.

Long-term trends

The relative weight of foreign investors more than quadrupled, from 10% in 1975 to 45% in 2012 (or 38% in 2012 if European funds domiciled in Luxembourg and Ireland are considered as domestic investors rather than foreign investors).

If all European funds that hold shares of companies registered in another country than the country of domiciliation of the funds are classified as foreign investors, the share of foreign investors ranges from 10% to 58% across countries. It is superior to one third in a majority of countries, including in large countries where there is a saving pool that would be sufficient to meet the needs of the domestic market: investors have been diversifying their portfolio abroad and a symmetrical move also happened with foreign investors becoming prominent shareholders of European firms. Since 2008, the share of foreign investors has stabilised. If European funds domiciled in Luxembourg or Ireland are considered as domestic investors, the share of foreign investors in European market capitalisation decreases by seven percentage points (38% instead of 45%).

Statistically, governments have become marginal players in the European stock market (4% in 2012 against 7% in 1975).

However, the impact of public intervention is only partly reflected in percentages of holdings in market capitalisation because most companies owned by the government were not listed before being privatised and symmetrically, many companies stopped being listed after their nationalisation. The successive waves of privatisation, starting in the United Kingdom in the 1980s and followed by continental Europe in the next decades, dramatically broadened European markets and enabled European and non-European institutional investors to invest large amounts in European equity markets.

Investment funds and “Other financial intermediaries” increased from less than 10% until the 1990s to 21% in 2012.

Our estimation includes holdings of domestic funds, round-trip funds and pan-European funds domiciled in Luxembourg or Ireland. The main beneficiaries of the ”European passport” given to UCITS were Luxembourg and Ireland. The share of European funds domiciled in Luxembourg or Ireland increased from 1% to 7% from the beginning of the 1990s to 2012. We estimate that Luxembourg funds held stakes of 360 billion euros in European companies and Irish funds held stakes of 227 billion euros at end of 2012: together, their weight is almost half of that of all other investment funds in their own country.

Insurance corporations and pension funds, after having reached a maximum of 28% in 1992, declined almost continuously and represented no more than 8% in 2012.

Pension funds, like PAYG systems, faced the consequences of an ageing population: the ratio of contributions to benefits decreased or even became negative and the outstanding assets were only sustained by the revenues of the portfolio. Moreover, asset allocation has changed to the disadvantage of stocks for several reasons: shortening in the duration of liabilities, accounting rules, the forthcoming Solvency 2 directive, and the perception by stakeholders that risks on financial markets have increased.

Part of the decrease of insurance corporations and pension funds has its counterpart in the increase of investment funds. There are three possible ways for institutional investors to manage their assets: they can manage their portfolio by themselves, they can delegate the management to external portfolio managers through a mandate or they can buy investment funds shares. Mandates and dedicated funds are very similar solutions, and a shift from the former to the latter is not necessarily significant from an economic viewpoint.

Banks are now the smallest category of investors, with a share of 3% in 2012 (7-8% in the 1970s).

The prudential regulation has considerably increased the cost of shareholding in terms of capital requirement for the banks.

The weight of non-financial corporations was divided by two, from 30% to 16% over the period.

The participation of non-financial corporations in the stock market varies considerably across countries: traditionally low in the United Kingdom, high in Italy, and decreasing in France.

individuals have become major indirect stake holders in the equity market through retail investment funds and “packaged products” offered by financial distributors.

The weight of households was divided by almost three, from 28% to 11%.

Private investors have been numerous to participate in the privatisation programs but for a limited amount on average. However, individuals have become major indirect stake holders in the equity market through retail investment funds and “packaged products” offered by financial distributors. The actual control of those indirect holdings of EU citizens in the EU listed companies have been transferred to financial intermediaries who are supposed to exercise their powers, including voting rights, on behalf of their clients.

Recent trends

During the 2000s, the share ownership structure of European listed companies was rather stable, with an exception: the value in euros of insurance and pension funds continued to decrease, a trend that started at the beginning of the nineties.

The financial crisis starting in 2008 did not change the share ownership structure dramatically, despite several reconstitutions of banks’ capital, translating into temporary acquisitions of stakes by general governments or state-owned financial firms.

Considering European investors rather than only national ones as domestic

Our data also allow for a breakdown of foreign investors into non-European investors and European investors and for a re-allocation of the latter to their relevant category of investors. Such analysis gives a quite different picture of the share ownership of listed European corporations: At the end of 2011, non-European investors accounted for 22% of market capitalisation holdings against 44% for all “non-national” investors.

Intra-European cross-border investments are mainly attributed to investment funds:

  • Investments of European funds (other than funds domiciled in Luxembourg or Ireland) in quoted shares of companies registered in the country of domiciliation of such funds accounted for 14% of the overall European market capitalisation.
  • Investments of European funds (other than funds domiciled in Luxembourg or Ireland) in quoted shares of companies registered in another country than the country of domiciliation of such funds accounted for 4% of the overall European market capitalisation.
  • Investments of funds domiciled in Luxembourg or Ireland in quoted shares of European corporations accounted for 7% of the overall European market capitalisation.

Therefore, overall the share of investment funds is higher: 25% versus 21% on a purely national basis.

Direct intra-European cross-border investments of investors other than investment funds are still limited.

About Didier Davydoff

Didier Davydoff is the Managing Director of INSEAD OEE Data Services (IODS) and of the European Savings Institute.

Previously, he was a director at Bank of France, at the French market authority and at Paris Bourse.

He was one of the founders of STOXX Ltd.

Didier Davydoff  has been a member of the ECMI’s Advisory Committee, a member of the Board of Association Française de Finance (AFFI), a member of the advisory panel of financial services experts of the Committee on Economic and Monetary Affairs of the European Parliament.

The European Savings Institute (Observatoire de l’Epargne Européenne) is a not-for-profit association whose mission is to research on savings in Europe. Banks, insurance companies, asset management companies, professional associations, financial authorities are represented among the members of the association. The European Savings Institute has been working among others for the European Central Bank, the European Commission, the European Parliament, OECD.

IODS is a data aggregator dedicated to academic researchers and market professionals in markets and finance. IODS offers customised services, including client-oriented data, documentation, support and economic analysis. More than 30 research centres subscribe to IODS offer. IODS was also appointed by major institutions, including the European Commission, to gather, process and study financial data.

FSUG is an expert group of the European Commission ensuring users expertise and input to the EU policy on financial services
For years 1970 to 1974, available data are not representative enough for running any estimation