Kings for a day

As Britain heads for the polls, our analysts imagine what they’d do givrn a chance to implement economic reform…

 
Would you ask Rishi Sunak which investment trust to buy? I might ask him for a betting tip, but I think the closed-ended fund world is a little outside of his zone of expertise

In the spirit of asking people about things they are totally unqualified to answer, we thought we’d ask our analyst team how they would fix the UK after the election. We will have a new government of some sort, and the chance of a fresh start. So we set the KTI brains trust to work on coming up with one policy idea each to solve the UK’s economic problems. The results were, well, mixed. I think it is fair to say that we do not fear losing our analysts to Labour economic ministers’ policy teams, although we would consider any transfer deal that would see cost disclosure reform prioritised by the new administration as a quid pro quo.

The current cost disclosure regime is one factor being blamed for wide discounts in the investment trust space, and we think reform would have a meaningful impact on the average rating. Discounts are still unusually wide across the investment trust space as a whole, even if they have come in since Q4 last year.

There is plenty of scope for a new government to affect this in a number of ways. In particular, we would highlight the importance of regulation and policy to many alternative assets sectors, where trusts like Greencoat UK Wind (UKW) and The Renewables Infrastructure Group (TRIG) sit on wide discounts. Additionally, we note the UK All Companies sector sits on an average discount of 11%, compared to just 8% for the Europe sector.

Mid-cap focussed trusts like Mercantile (MRC) (12.2% discount) and Schroder UK Mid Cap (SCP) (10.9% discount) stand to do well if there is a rebound in sentiment towards UK assets. The property sector may be another place to look for discount opportunities post-election, with trusts like Schroder Real Estate (SREI) (27.8%) trading on wide discounts, which may be sensitive to UK monetary and fiscal policy as well as GDP growth.

Creaking healthcare systems around the world, shows that the NHS is not alone, but it is likely to be targeted for reform by a new government. It makes sense that any company able to provide meaningful and lasting improvements to the productivity and effectiveness of health care should find a ready market. BBH is one trust that specifically targets small and mid-cap companies that offer just these solutions, and trades on a 6.4% discount.

It may simply be that waiting for rates to come down will see all the apparent problems in our sector dissipate. It may be that discounts will narrow and it will all turn out to have been about valuation and liquidity all along. A cynical person might suggest that ‘waiting’ is likely to be closer to the new government’s economic policy than the somewhat spicier policy ideas offered below.
 

Ryan Lightfoot-Aminoff – Fix the housing market

 
In true politician’s style, my ‘one’ policy actually has two elements to it. The first would be to tax any profits made on residential housing above the rate of wage inflation, whilst also providing tax incentives to invest into UK companies.

Whilst clearly outing myself as a millennial (est. 1990), I believe we need to break the concept of housing being seen as an investment asset and instead treat it as what it is: a social need. By taxing any capital gains made on residential housing made above wage inflation, this should help to keep housing affordable for future generations by stopping any further inflation of the housing bubble.

It’s also important to note that the housing policy would not be retrospective, therefore there would be no plan to start raiding households for their accumulated property wealth. What it would do though is ensure that disposable income, especially of those early onto the housing ladder, is not increasingly spent on elevated housing costs, but also mean that those fortunate enough to have capital to invest will be tempted to look to other assets for returns.

To encourage those displaced housing investors, I would offer tax incentives on investments into UK companies. This would not only reverse the outflows affecting the UK’s weakened stock markets but also provide much needed investment capital for growing UK businesses. This would start with ISAs, where I would set a minimum level of 50% in UK companies.

Furthermore, I would scrap stamp duty for investments into UK companies for individual UK taxpayers. I appreciate the definition of a ‘UK company’ is currently under review, though my starting point would be companies that are headquartered in the UK, have the majority of their staff working in the country and pay the majority of their corporation tax to the UK government. Should this be a success, there is plenty of scope for this to be expanded to capital gains breaks on unlisted companies too.

I appreciate both of these elements are very high level and will need significant work on the details, though I believe one of the best ways to support the finances of the UK population is to lessen the impact of one of their highest costs, as well as to encourage the redirection of savings into an asset class that can improve the economy for years to come.

Alan Ray – Simply start a wealth fund

 
Anyone who has read former prime ministerial hopeful Rory Stewart’s Politics on the Edge could be forgiven for thinking that the situation is truly hopeless, as Rory paints a picture of government beset by impenetrable problems, compounded by the swing doors of politics where ministers only spend a handful of years, or less, managing, or more likely not managing, departments they are entirely unsuited to, often with little or no experience to inform their decisions.

I don’t necessarily agree with Rory on everything he says, although he does seem very popular, but the charge of ‘short-termism’ resonates with me, and I think the charge stacks up equally against those at all points on the political spectrum.

This is not a new phenomenon, although clearly social media and the 24-hour news cycle have exacerbated it, and when I recently read an article about the proud legacy of one of Britian’s foremost politicians of the 1970s, Tony Benn, and the instrumental role he played as energy secretary in developing the UK’s North Sea oil fields, my immediate thought was ‘yeah, that’s great Tony, but where’s the sovereign wealth fund? You just spent the money, didn’t you?’ This was entirely unfair because as I read on, I learned that it was the Treasury that vetoed the sovereign wealth fund idea, not Tony, and before anyone thinks I’m making a party-political point, every subsequent government has seemed just as happy to spend the money and find reasons and justifications not to save some of it for the future, and in my view it’s all tied up with the short-termism we’ve created for ourselves through our political system.

I’m also not sure that I entirely accept that the UK needs fixing, so much as to take a step back and remember that it’s still a powerhouse economy, with incredible pharmaceutical, engineering and technology companies, but just as importantly education, arts, music, film and video gaming, sports, to name just a few industries, that many countries envy and all of which generate vast revenues for our country.

Instead, we tend to lurch around, prioritising one thing or another for a few years and politicians focus on what they think are projects that we can all understand, like a factory or a railway line, rather than crediting us with the intelligence to understand that all those other things I’ve listed above make money and might benefit from a little bit of long-term investment, even if they don’t get the relevant politician a spot on the news cycle. And, as we love to say at Kepler, diversification really matters.

Short-termism is something we can start to fix but almost self-evidently it requires long-term thinking to do it. One part of that could be the creation of a sovereign wealth fund, and in my view the uncomfortable nettle that needs to be grasped in doing this is that it would not benefit all of us equally but would mostly be to the benefit of people under 25.

I have the luxury of making this proposal without having to ‘fully cost’ it, to use the phrase du jour, so let’s go one step further and say that we gift some units in this fund to everyone as they leave school, giving them a stake in their own country, and giving them a valuable lesson through their lives in the power of compounding. Perhaps anyone else can still buy units if they so wish and maybe we could think about how the tax system might encourage that. Perhaps units are not saleable, and one owns them for life.

Then after, let’s say, 50 years, they start to pay dividends. Luckily, I’m not standing for election so I don’t have to work out the details, but the main point is, we need to find a way to think more long term, when ‘long term’ means decades not years, and to give everyone a sense that investment can make a real difference to people’s lives.
 

Thomas McMahon – Reform the health system

 
I think if I had proposed the abolition of our National Health Service in 2014, I would have been dragged from obscurity into the limelight of the national press and made subject to the unforgiving scorn of the scintillating intellects that make Twitter (X), Reddit and the Today programme the torch-bearers of Western civilisation. I would have been tenuously linked to the Conservative Party (for once having sat next to a parliamentary researcher perhaps?), which is, as all online bores know, secretly devoted to privatising the NHS for the benefit of our rich friends – whoops, I mean ‘their’!

I sense that the debate has now moved on. Why it has moved on is interesting in itself. Our NHS has never performed well by international comparison, when you look at metrics such as ‘keeping people alive’. So while there may have been a deterioration in the standard of care in recent years (if only due to the pressures of dealing with the post-pandemic waiting lists), I don’t think that is why making fundamental changes to the way our health system is funded is now a socially acceptable opinion to voice.

I think there is a generational effect, whereby the creaking systems of a national bureaucracy lead to service and outcomes that would be impossible in the private sector. Expectations are higher. Be that as it may, I want to take advantage of this new freedom to query the national religion, and propose that abolishing the NHS and replacing it with a system of compulsory insurance-based healthcare would have the single greatest impact of any possible policy on the health of the UK economy.

I think it would do so for two reasons. First, our poor health as a nation is one of the key reasons for our productivity being so poor. According to the Health Foundation, 3.7m people in the UK workforce have a ‘work-limiting’ condition, meaning it limits how much they can do, and this figure is up by 1.4m since 2014. That is a 38% increase.

The rate has grown the fastest amongst younger workers, with mental health a particular issue for them, although not exclusively. Across the population as a whole, musculoskeletal and cardiovascular conditions are the major culprits. This trend was rising before the pandemic, although the latter has undoubtedly made things worse. The OBR estimated the increase in health inactivity since the pandemic will have cost the Treasury c. £16bn in lost tax revenue and welfare support in the 2024 fiscal year alone.

This isn’t the NHS’s fault, of course, but it is clear that it is not up to the task. Spending has risen from 8% of GDP in 2014 to 12% of GDP in 2023, and yet the country is getting sicker. We need to try something else.

The second reason is that productivity in the NHS is itself poor. While it is not the worst-performing part of the public sector by any means, 3.5% productivity growth p.a. between 1997 and 2023 is pretty poor, and is well below the anaemic productivity growth in the UK economy as a whole.

When you consider the incredible advances in medical science and software and computing over this time period, it really isn’t good enough. A healthcare system in a rich, aging country is going to require a huge amount of resources, and suboptimal organisation is going to have a massive effect on the overall productivity of our economy. Over to you, Wes.

Within the investment trust sector Bellevue Healthcare (BBH) was set up, recognising that modern healthcare systems – all around the developed world – are broken, and that the only way governments are going to get themselves out of trouble are to get more for the money they spend. Managers Paul Major and Brett Darke target a concentrated portfolio of companies that they believe will contribute to solving structural heathcare problems. Their mid and small-cap companies offer a wide variety of solutions in a broad range of areas.

William Heathcoat Amory – Overhaul the grid

 
The noticeable feature of the current decade has been how, despite being part of the modern ‘connected world’, what connects us all is an addiction to fossil fuels.

The main energy producers (the Gulf states, Russia, Iran, US) are, or are predicted to soon be, run by unpredictable tyrants. We are all complicit in propping up these regimes by pouring vast quantities of cash into their economies (or the despot’s pockets), holding us back and forwarding their interests over ours.

This, and the urgent need to decarbonise energy markets to reduce CO₂ emissions, means there is a pressing need to continue the energy transition at speed. But becoming free of the burden of paying an energy tax to dodgy regimes would also set the UK up with a significant competitive advantage, with low cost and plentiful energy that really would allow us to become a dynamic, growing economy fit for the modern world. The aim should be to rewire the grid to better allow for renewables and battery storage.

In the UK the energy transition is being held up by the transmission network, which cannot yet handle a very different, very dispersed generation model. Aside from capital, and the fact that the National Grid is a privatised monopoly, which (rather like BT and broadband) isn’t incentivised to quickly adapt, one of the hold-ups is the planning system.

My policy would beef up the Ofgem regulator and set aggressive targets for rebuilding the network by combining public and private capital. It would streamline planning permission at a national level for the power grid, taking a top-down, co-ordinated approach to enact radical change. And at the ground up, provide incentives for homeowners and businesses to install their own renewable generation technology.

The policy would change the personal tax regime to incentivise homeowners to insulate their homes, and install solar and battery kits. A relatively low investment per household (maybe £12,000 is needed for a combined 5 kW solar and battery set-up) would meet the baseload requirements for the current average UK household electricity consumption of 2,700 kWh per year. This doesn’t account for large-scale adoption of heat pumps and EV charging, the electricity for which could be met by either wind and solar farms or larger domestic PV set-ups. Private capital is queuing up to invest in these assets, held back by the bottlenecks in delivering them.

In my view, the current malaise in renewable energy trusts that is preventing them from raising additional equity capital to further invest in this space is a temporary factor, which will dissipate once interest rates start to fall. The likes of UKW and TRIG are in an excellent position to continue the UK’s journey of taking back economic control from those dodgy despots around the world lucky enough to be sitting on reserves of fossil fuels.

Joe Licsauer – Invest in housing and infrastructure

 
The question of what I would do if I were in power for a day is an intriguing one. It’s sparked many ideas regarding the possible policies, incentives and outlandish ideas I could champion as the UK’s new PM.

Some rather unrealistic but attention-grabbing ideas came to mind first, such as introducing tax incentives to encourage private investment in space mining ventures. We could then leverage ‘out of this world’ resources for economic growth and technological innovation.

Another bold notion involves launching a project to build sustainable, self-sufficient floating cities off the coast of the UK, powered by renewable energy and cutting-edge waste management technologies, aiming to accommodate population growth and combat climate change.

Having tethered myself back to earth somewhat, I started to think more practically, contemplating how to address critical areas of the UK economy, such as the NHS and our education system. However, there are two issues in particular that trouble me and that I feel need to be addressed. Firstly, having recently got onto the property ladder, I observed the significant hurdles and challenges faced by first-time buyers. Secondly, the state of our public transport system, especially the chaos within rail travel, demands urgent attention.

I propose a more efficient use of our infrastructure bank, ideally through the establishment of a focussed Housing and Transport Fund, to better tackle these issues. It would be seeded from the money in the Treasury or through issuance of government bonds, investment from the private sector, issuance of infrastructure bonds or even revenues from current infrastructure projects.

While constructing more affordable homes is often cited as a solution to property issues, in recent years many developers have struggled to sell or rent the new builds and affordable homes they’ve constructed, leading to increased foreign investor interest. This undermines the intended benefits, in my view. Therefore, the proposed fund aims not only to increase affordable housing stock but also to refocus efforts on selling existing homes to UK buyers.

One approach would be reigniting the rent-to-own or rent-to-mortgage schemes, potentially reforming the Housing Act 1980. These initiatives would allow individuals to rent affordable homes, new builds or council houses with the option to apply accrued rent towards a deposit or purchase price over time. The fund could also support public education on home-buying and saving processes, as well as streamline mortgage approvals and applications.

Regarding transportation, a portion of the fund would be allocated to explore more robust public–private partnerships. For instance, we should not be in a position that a return train journey from Manchester to London costs as much as an all-inclusive, week-long holiday in Spain, while a similar train journey in countries like Germany costs a fraction of the amount. It’s not like you’re paying for efficiency either, as delays, cancellations, inadequate cleaning, and overcrowding are prevalent. This necessitates stronger partnerships to not only better transport infrastructure but also improve transport management, enhance station and rail maintenance, and prioritise staff well-being to mitigate strike occurrences.

Disclaimer
This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. This material should be considered as general market commentary.