The Scotsie 100: Sixty Years of Scottish Stocks

THE SCOTSIE 100: SIXTY YEARS OF SCOTTISH STOCKS Paul Marsh and Scott Evans 60-year performance index of Scottish shares Implications for companies and investors of a “yes” vote The case for and against a Scottish stock exchange THE SCOTSIE 100: SIXTY YEARS OF SCOTTISH STOCKS_1 The Scotsie 100: Sixty years of Scottish stocks A number of the UK’s leading quoted companies are based in Scotland. With Scottish independence now a possibility, and greater devolution a near certainty, this article assesses the implications for Scottish stocks, equity markets and investors. We construct a Scottish stock market index spanning the last 60 years, and show how Scottish listed companies and the index have changed over time. We compare the performance of Scottish stocks with the rest of the UK and seek to explain the differences in risk and return. Looking ahead, we examine the implications of a “yes” vote for Scot- tish companies and their likely future domicile. Finally, we look at the history of Scotland’s stock exchanges, and assess whether it would be desirable or indeed feasible to re-establish a Scottish Stock Exchange. Paul Marsh and Scott Evans Paul Marsh is Emeritus Professor of Finance at London Business School, Regents Park, London, NW1 4SA. Scott Evans is at Walbrook Economics, 12 Sudeley Street, London N1 8HP. Email: [email protected] [email protected]. The authors would like to thank Ewen Stewart for invaluable contribu- tions, comments and insights. Sixty years ago, there were four Scottish stock In the third part of this article, we examine the exchanges in Glasgow, Edinburgh, Aberdeen and potential impact on Scottish quoted companies of Dundee. In 1964, these merged to form the Scot- Scottish independence. In particular, we focus on tish Stock Exchange, with Glasgow as the lead factors that might lead companies to change their exchange. In 1973, Glasgow merged with the domicile, either away from Scotland, or to Scot- London Stock Exchange and closed. But both land. before and after this closure, the main trading In the final section, we look at the desirability, venue for Scottish stocks – as for English, Welsh feasibility, and likelihood of Scotland reestablish- and Northern Irish stocks – was London. ing its own stock market. Over the last 25 years, In this article, we start by describing the char- most countries that have achieved independence acteristics of Scottish stocks traded in London or transitioned from communism towards econom- over the last 60 years. We construct a Scottish ic liberalism have set up their own national stock stock market index, together with a companion exchanges. On the face of it, it would seem odd if index for the “Rest of the UK”. We examine the Scotland, with its long history of financial services composition of the Scottish index both today and and markets, and its established body of Scottish- 60 years ago, documenting its largest constitu- based listed companies were to be an exception. ents, industry breakdown and concentration. We Yet we argue that the case for a viable Scottish also look at the changing weights of Scottish stock exchange is more nuanced than it first ap- stocks within the UK market since 1955. pears. In the second section of this article, we compare the performance of Scottish stocks with 1. The Scottish Stock Market Index those from the Rest of the UK over the 60-year period since 1955. Besides documenting perfor- To construct our Scottish Stock Market index, we mance, and analysing performance deviations, we used London Business School’s London Share also examine comparative risk and return over Price Database (LSPD). LSPD provides a com- time, and look at correlations with other countries. prehensive record of share prices, capital changes and dividends for UK quoted shares traded on the THE SCOTSIE 100: SIXTY YEARS OF SCOTTISH STOCKS_2 London Stock Exchange going back to 1955. Standard Life are clearly viewed as Scottish. Yet Most of the companies listed on the exchange in Weir Group is a global business, with only 4.3% 1955 are long dead, thanks to takeovers and of its revenues from the UK (let alone Scotland), other delistings, including company failures. And and just 5% of its assets in the UK. Similarly, since 1955, many new companies have been more than 90% of Standard Life’s customers are born. LSPD includes all non-surviving, as well as outside of Scotland. Indeed, if a company’s na- currently listed, companies. This allows us to tionality were to be assessed from the location of create an index that is free of “survivorship bias”, its customers or assets, numerous companies that as in every year, it is based on all the companies FTSE and other index compilers currently classify that were listed at that time. LSPD also has full as “UK” would be deemed “non-UK”. dividend information, so we can accurately calcu- Similarly, the location of a company’s share- late investors’ total returns, including income. holders is of no help in determining Scottishness. Unfortunately, LSPD does not provide a marker Both Weir Group and Standard Life are globally to show which companies were Scottish at each held, with Scottish investors accounting for only a point in time, nor is there any other easy source of small minority of each company’s share register. this information. We therefore had to collect this Nor does the country of registration provide a by hand – a significant task, as LSPD contains definitive test. Registration of companies in Scot- data for over 10,000 UK companies (8,000 of land began in 1856, when the post of Registrar of which are now dead) over its 60 year history. We Companies was created in Edinburgh. The post- also needed a robust definition of “Scottishness”. holder is now an official of Companies House, an Executive Agency of the UK government. Compa- Identifying Scottish companies nies registered in Scotland have registration num- bers prefixed “SC”. In many cases, however, such Determining a company’s nationality is non-trivial companies have long since severed all ties with and a vexed issue for the major index providers. Scotland, leaving only a brass-plate presence. FTSE International has a page and a half of rules In judging Scottishness, the variable to which on this. The basic rule states “If a company is we give the greatest weight is the location of incorporated in one country and has its sole listing group headquarters. So if a company is registered in the same country, FTSE will allocate the com- in Scotland and has its head office in Scotland, pany to that country.” The numerous exceptions to we view it as unequivocally Scottish. However, if it this rule then get referred to the FTSE Nationality has an “SC” registration, but its head office and Committee for a decision. control is outside of Scotland, we normally deem it Unfortunately, we cannot borrow even FTSE’s “not Scottish”. If its head office is in Scotland, but basic rule to judge whether a company is Scottish, it is registered in England and Wales, we normally as hitherto, the “country” in question has been the view it as Scottish. When there is a move, for United Kingdom of which Scotland is an integral example from Scotland to England, as when part. Nor can we reliably assess whether a com- Christian Salvesen transferred its head office to pany is Scottish based on the location of its cus- Northampton in 1998, we deem the company tomers or assets. For example, Weir Group and Scottish only until the date of the move. We adopt a slightly different approach for in- Figure 1 vestment companies. Scotland was a pioneer in Largest 20 Scottish quoted companies at start 2014 the field of investment trusts, and they have been a Scottish speciality since the 19th century, with Source: Paul Marsh and Scott Evans; London Business School’s London Share Price Database many trusts registered and managed in Scotland. If an investment company is registered in Scot- SSE 13.2 land, we treat it as Scottish, as it is often hard to Standard Life 8.5 Royal Bank of Scotland 7.2 establish precisely where it is managed or con- Aberdeen Asset Management 4.6 trolled. But if it is registered in England & Wales, Weir Group 4.6 but is known to be managed or controlled in Scot- Aggreko 4.3 land, we also deem it to be Scottish. Scottish Mortgage Investment 2.6 Alliance Trust (The) 2.5 Multiple sources were used to establish “na- Wood Group (John) 2.5 tionality” based on these criteria. For earlier years, Templeton Emerging Markets 1.7 we relied mostly on the Stock Exchange Year- Cairn Energy 1.6 Stagecoach Group 1.6 books, which give the company’s main address, FirstGroup 1.5 and whether it is Scottish registered. For later Murray International Trust 1.3 years, we used London Stock Exchange website Edinburgh Investment Trust 1.2 files (December 2006 until October 2013) giving Aberforth Smaller Companies 1.0 Monks Investment Trust 0.9 the regional affiliation of UK companies. To elimi- Scottish Investment Trust 0.7 nate errors, we checked these against other Murray Income Trust 0.5 sources, including Thomson Reuters Datastream, Personal Assets Trust 0.5 Extel Financial Company Analysis, and Bloom- 0 2 4 6 8 10 12 berg, all of which provide company location infor- Free float market capitalisation (£bn) at start 2014 mation, including for “dead” companies. Where THE SCOTSIE 100: SIXTY YEARS OF SCOTTISH STOCKS_3 conflicts were identified, further sources were large market, is more concentrated than Scotland, accessed, including The Companies House regis- with 20% and 52% weightings for the largest and ter, RNS statements, company websites and top three stocks, respectively.

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