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«SUBMITTED TO: EUROPEAN COMMISSION and FINANCIAL SERVICES USER GROUP UNDER THE TENDER: WHO OWNS THE EUROPEAN ECONOMY ? EVOLUTION OF THE OWNERSHIP OF ...»

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FINAL REPORT

SUBMITTED TO:

EUROPEAN COMMISSION and FINANCIAL SERVICES USER GROUP

UNDER THE TENDER: WHO OWNS THE EUROPEAN ECONOMY ? EVOLUTION OF

THE OWNERSHIP OF EU-LISTED COMPANIES BETWEEN 1970 AND 2012

Negotiated Procedure – Call for tenders n° MARKT/2012/077/H

OBSERVATOIRE DE L’EPARGNE EUROPEENE - OEE (PARIS, FRANCE)

INSEAD OEE DATA SERVICES – IODS (PARIS, FRANCE)

AUGUST 2013 THE AUTHORS

OBSERVATOIRE DE L’EPARGNE EUROPEENE (PARIS, FRANCE)

The European Savings Institute (Observatoire de l’Epargne Européenne, OEE) was created in 1999 with two goals: information and data collection on credit and savings and to encourage research that contributes to the public debate. OEE consists of financial institutions, professional associations and public institutions based in Europe. The OEE has in the past worked for the European Commission, the European Parliament, OECD and the European Central Bank among others.

INSEAD OEE DATA SERVICES (PARIS, FRANCE)

INSEAD OEE Data Services (IODS) is an online data platform that provides access to databases on finance and the economy. IODS offers a large amount of data and associated services to academic researchers and economists in finance, the quality of which is recognised by the scientific community. IODS core objective is to gather, reprocess and structure large volumes of financial data on European markets (including market and corporate data, investment products and macro-financials) in a coherent fashion. IODS ensures that data are collected from a diverse range of sources such as data vendors, existing data platforms and proprietary databases.

The team in charge of the present report included Didier DAVYDOFF, Daniele FANO and Li QIN.

ACKNOWLEDGMENT

We thank members of the Financial Services User Group (FSUG) for their comments on a previous version of the study, specially the chairman, Mick McAteer and the vice chairman, Guillaume Prache. We are very grateful to national experts who helped us by providing data and answering our numerous questions: Pedro Abad of Banco de España, João Cadete de Matos and Carla Marques of Banco de Portugal, Rudi Acx of Banque Nationale de Belgique, Rini Hillebrand of De Nederlandsche Bank, Maciej Anacki of National Bank of Poland, Derek Stynes of Central Statistics Office Ireland, Schibu Zappold and Leif Lengelsen of Deutsche Bundesbank, Germain Stammet of Bank of Luxemourg, Luca Filippa of FTSE, Stéphane Janin, Carlos Pardo and Thomas Valli of AFG.

Table of Contents Executive summary

Introduction

1. Description of data used to build the database.

1.1 National Financial Accounts

1.2 Portfolio investments in Balances of Payments

1.3 WFE statistics on total market capitalisation

1.4 OECD data on institutional investors

1.5 National data

1.6 Representativeness of available data

2. Detailed classifications

2.1 Defining the categories of investors

2.2 Defining the geographical scope

3. European trends

3.1 The growth of the capitalisation of European listed companies

3.2 Overall trends of share ownership structure

3.3 Governments

3.4 Households and non-profit institutions serving households (NPISH)

3.5 Investment funds and other financial intermediaries

3.6 Life insurance and pension funds

3.7 Non-financial corporations

3.8 Foreign investors

3.9 European investors

4 Country trends

4.1 France

4.2 Germany

4.3 Italy

4.4 United Kingdom

5 Who really owns the European economy?

6 Updating the database

Annex 1: A brief review of studies on share ownership in Europe.

1. National financial accounts

2. The OECD finer classification of financial instruments and related analyses.

3. The reconstruction of longer time-series of stocks and flows and related analyses................ 60

4. The detailed breakdown of asset holdings by country and by sectors

5. Research on Foreign Direct Investment (FDI)

6. FESE share ownership survey

Annex 2: Processing of CPIS and Financial Accounts data

1. The general framework

2. Excluding cross-border investments in investment funds

3. Taking account of foreign direct investments in listed shares

4. Excluding cross-border portfolio investment in non-listed stocks

Annex 3: Detailed country sources

France

Germany

Italy

Spain

Sweden

United Kingdom

Bulgaria, Czech Republic, Estonia, Lithuania, Poland

Cyprus

Latvia

Malta

Hungary

Luxembourg

The Netherlands

Romania

Slovakia

Pan-European funds

Annex 4: How to update the database

Annex 5: Detailed data on long-term trends of share ownership structure

Annex 6: Detailed data on share ownership structure: European perspective





Executive summary

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 capitalisation 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 Germany1)  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 panEuropean investment funds to domestic investors rather than foreign investors.

Long-term trends

–  –  –

For years 1970 to 1974, available data are not representative enough for running any estimation  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 funds2 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 Round-trip funds are Luxemburg and Ireland-domiciled funds promoted by national intermediaries to clients in the home country of such intermediaries. They benefit from a more flexible authorization process by market authorities and from a more advantageous taxation.

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.

 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.

 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.

–  –  –

Limitations and future outlook There are limitations to our findings that should be overcome in further research: We have been forced to estimate several figures and we noticed some statistical breaks in available official data.

Among other issues, securities held by custodian banks for the account of clients might have been computed as being the ownership of the bank instead of the one of the final holder. Further research could gradually eliminate these inaccuracies.

Without waiting for these new advances in research, FSUG could annually update the statistics on share ownership in Europe by using national financial accounts. Although this will not allow for a breakdown of foreign investors between European and non-European investors, such updates will highlight the main future trends. Updating the breakdown between European and non-European investors would hardly be possible without the cooperation of specialised statisticians.



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