The emerging importance of ESG rating agencies

We recently had an interesting set of conversations with Charles Nelson, Head of UK at Morrow Sodali, about the role of ESG rating agencies and their impact on the investment decision making process. This guest post by Charles summarises key takeaways from recent Lighthouse publication and takes a look at ESG rating agencies, their focus and their influence today as well provides a few very helpful pointers for IR teams about engagement with investors on ESG topics.


  • ESG ratings are becoming more prevalent and are commonly used by institutional investors in assessing the ESG performance of their portfolio companies.

  • According to the Principles for Responsible Investment’s (PRI) 2018 Annual Report, the total value of assets managed by institutional investors (AUM) who integrate ESG into their investment process is US$89.65 tn and is growing rapidly.

  • The sheer scale of the portfolios where ESG is integrated means that the largest global asset managers are increasingly having to rely on often external, quantitative assessment of ESG performance.

  • Just like the credit ratings, ESG ratings are based on past performance, whether policies, practices or in some cases controversies.

  • However, “ESG-worthiness” may not be as straightforward as credit worthiness, and the use of event indicators means that ESG agencies may penalize companies for controversies long after they have addressed and rectified the underlying problem.

  • Furthermore, unlike financial information that underpins credit worthiness assessments, ESG information varies a lot in scope and quality as international standardisation is in its infancy. For Emerging Markets, one key issue is that disclosure is often less extensive than it is in equivalent DM sectors and markets. The outcome may be that they could be penalised in their ratings for lack of disclosure, not for poor performance.

  • For this reason, understanding 1) the rating agencies and how they determine their ratings, and 2) how investors use these ratings, is essential when planning corporate reporting and it is recommended that it is based on shareholder outreach and engagement, to make the dialogue productive and efficient.

Rating agencies and their focus

  • ESG rating agencies use publicly disclosed information (ie that is broader than just the annual report, for example sustainability disclosure or information available on the company’s website). Additionally, especially when it comes to event indicators, indicators may draw on media and social media reports, and sometimes information gathered from direct data inquiries and requests (for example, via survey questionnaires).

  • Data points analyzed by the rating agencies typically depend on the materiality assessment they conduct on market, industry and/or company level with respect to Environmental variables, Social aspects and Governance areas.

  • Most of the large ESG rating agencies operate internationally, employing their own methodologies to generate their own ESG ratings. The raw data collected tends to be uniform across markets, with ratings then adjusted to reflect relativities. This means that data biases such as for size (eg indirectly penalizing smaller companies who usually have more limited disclosure), market or sectors (eg penalizing sectors with more pronounced environmental impact) are addressed but some could remain.                                                                                                         

  • While some ESG rating agencies are taking a more risk-based approach and therefore position themselves as a natural tool for investment decision-making, others employ methodologies that are more ethically driven.

  • While companies and their investors are typically aware of business material factors, the visibility of companies over reputational sensitivities of their shareholders and their beneficiaries is limited.

  • As a result, one of the first steps in the process of understanding the impact of the ESG ratings on a company and its shareholders is to ensure that the difference between the business materiality (value) and reputational risks (values) is acknowledged and addressed.


How do investors use ESG ratings?

  • Investors use sustainability ratings in their investment decision-making process, as well as investment management process and prioritization of company engagement.

  • The ratings are considered complementary to traditional investment processes and existing strategies, in that they allow investors to screen for good and poor ESG performers with the aim of reducing their risk exposure, particularly in the long term.

  • We are aware of a growing interest and in some cases use of ESG ratings in investors’ custom voting policies, use of proxy voting platforms with proxy research which allows investors access to ratings that can automatically determine their vote for a specific resolution, and as basis for engagement and targeted call for action to other investors.

  • An interesting trend to note is the rise of investors compiling and applying their own, in-house ESG assessment on portfolio companies. This is based on their own interpretation of raw data and in some cases also systematically capturing information gained through direct company engagement for internal sharing.

  • The rationale behind these initiatives, as we understand it, is that investors are aiming to put forward their own view of the ESG themes and on how it is applied to their portfolio companies.


ESG-focused engagement

  • Naturally, companies are wishing to optimize the communication with their shareholders and demonstrate responsiveness to consensus expectations, but to do this they need to have clear insight of the shareholder base. In Emerging Markets shareholder bases can be rather board, with a mixture of domestic investors and international ones.

  • As a roadmap to understand the ESG views and expectations of your shareholders:

    • MAP your existing shareholders – consider investment strategies, geographic spread, stewardship profile.

    • TARGET investors you wish to become your shareholders, even if their current level of holdings reflects an underweight position. Particularly important is to identify responsible long-term providers of capital – for example investors targeting “real world” impact that is within the scope of your commercial activity.

    • CLARIFY Gain clear and granular understanding of your investors’ agendas. Do your homework before reaching out - it will support higher quality of engagement.

    • EMBARK on a programme of ongoing dialogue. Do not confine the contact with investors to pre-meetings touch points.

    • EVALUATE – as regulatory appropriate and commercially possible – to share ideas with your investors and to consult on significant changes of direction.

Whitepaper: Anticipating what comes after the IPO

Catherine Lynch, an established IR consultant in the Middle East, has recently teamed up with the Middle East Investor Relations Association to produce a handy and readable article focused on life as a public company post-IPO, with a specific focus on investor relations.

In a dozen or so pages, the paper puts forward various useful pieces of advice, amongst others; tips on creating an IR framework, duties of the IR team, production of reports, dealing with various audiences, and tools that may be useful in the process of setting up an IR function. The paper will come useful to all new IR teams, and probably most interesting for considering a stock market listing in the near term.

Download the paper here

For those with additional questions and thoughts may contact the author directly:

Catherine L. ZYCH
+971 526 75 99 87

Navigating institutional investor expectations : Tips for EM boards and executives

This is a guest post by Alissa Amico, Managing Director of GOVERN Center.

ESG (environment, social and governance) investing might well have emerged as the most fashionable acronym in the financial media in the past year. It encapsulates the growing expectations of the institutional investor community regarding the quality of corporate governance frameworks internationally, while demonstrating that investor expectations have in the meantime have also expanded beyond G(overnance).

With the growth of institutional investors - notably developed countries’ pension and insurance funds – these actors have become active not only domestically but also in emerging markets (EMs). Overall, of the almost 14 trillion USD of capital tracking MSCI indices, close to 2 trillion are now allocated specifically to Emerging Markets. In Turkey for instance, foreign institutional investors have until recently have accounted for half of the market capitalization.

This is significant for a number of reasons, including their influence on corporate governance. In many EMs, foreign investors are more active than domestic from a voting perspective since the latter’s participation in the capital market can be limited by law. Equally, many EM institutional investors lack the engagement culture and experience, despite having a better knowledge of the domestic market.

While developed market institutional investors are active in their own domestic markets, the extent of their participation in EMs varies depending on their risk appetite – Canadian institutional investors for instance tend to shy away more from EMs such as the Middle East than their American peers. Importantly, their participation is contingent on their perception of the quality of national ESG regulatory frameworks in individual emerging markets.

As such, Brazil has become a darling of foreign institutional investors due to the introduction a voluntary corporate governance listing segment (BOVESPA). While the success of BOVESPA has proven difficult to replicate, EM capital market regulators and stock exchanges have raised corporate governance requirements over the past decade, often at a faster pace than their developed market peers.

Both for EM regulators and companies this approach has delivered. On a macro-level, higher governance practices have proven to correlate with higher foreign inflows, as highlighted by the World Federation of Exchanges in its recent analysis of EM investing. Markets where a full set of well-established corporate governance requirements was in place received additional foreign inflows as high as USD 756 million over 2006-2018 period.

Indeed, foreign institutional investor participation in emerging markets is fundamentally linked to their appreciation of national corporate governance regimes, which generally include the governance code, listing requirements and any relevant provisions of the corporate law. It is likewise connected to their perception of the quality of oversight and enforcement which generally tends to be more problematic in EMs.

In many instances however, foreign institutional investors are not always aware of the extent of governance regulatory change that has taken place in EMs. Few investors are aware for example that listed companies in Oman are required to have a fully non-executive board. In part to make enforcement easier, the regulatory philosophy adopted by EM regulators tends to lean more on the side of mandatory regulations as opposed to UK-inspired “comply-or-explain” codes.  

Furthermore, foreign institutional investors’ understanding of strategy and governance of individual EM companies can be limited. Indeed, smaller companies not included in EM or large cap domestic indices often do not get any research coverage. Our earlier work in Egypt has demonstrated that only 10% of listed companies where followed by analysts whereas close to two-thirds of listed firms had no coverage whatsoever.

Indeed, collecting quality ESG data is frequently cited as the number one challenge by foreign institutional investors in different EM regions. They may not have access to annual reports in foreign languages or fully understand issuer disclosure, which in many cases remains not comparable due to the discrepancies in disclosure frameworks.

While the ESG data reported by EM companies remains patchy, expectations of its disclosure have high-rocketed in recent years. Encouraged by the recent stewardship trends worldwide, developed market institutional investors have introduced voting policies that reflect their specific investing philosophy.

In many cases – and this can indeed  be problematic – ESG priorities are not set in a country or region-specific manner. Blackrock, the largest institutional investor globally, has one voting policy for the entire Europe and Middle East region. Nonetheless, voting policies are an instructive read for boards and executives of EM companies wishing to differentiate themselves from the market based on the quality of their governance.

In particular, they may need to understand how foreign institutional investors’ stewardship and voting policies differ from national governance requirements. This can indeed be important especially for mid-cap companies that may not be automatically noticed by passive, index-tracking investors. In examining institutional investor voting policies, understanding their rationale and objectives is primordial.

For instance, in OECD member countries, having a majority independent board is a prevalent requirement whereas many EM regulators have shied away from imposing it as a standard. While EM company practices tend to mirror their domestic standard, expectations of foreign investors remain higher or different. In many instances, large institutional investors expect to have a largely or a majority independent board in listed companies.

Compliance of EM companies with foreign institutional investors’ ESG criteria matters and proxy firms voting their shares are instructed to do so with respect to these policies. For passive investors, lobbying for change may be conducted through a long-term engagement process. For active, stock-picking institutional investors, the approach may be more hands-on  since they often take risks in smaller, less known EM companies.

A key question then for EM firms is how to demonstrate their commitment to ESG in order to attract foreign institutional capital. Examining internationally recognised disclosure frameworks such as the IIRC to ensure the comparability of reported information is a critical first step. Too many annual reports of listed companies boast their philanthropic contributions and their positive environmental impact without any connection to company-specific risk factors, strategy or industry comparisons.

Some aspects of investor expectations may actually reflect priorities in their own markets and not necessarily those in EMs. This is perhaps most obvious when we consider the issue of executive remuneration. While executive and board remuneration has emerged as a major regulatory concern following the financial crisis, remuneration in EMs tends to be less of a concern.

As most EM companies are controlled either by the state or a family, board representatives who are often also major shareholders tend to be compensated by dividends, not sitting fees. In addition, board compensation in some EMs such as Saudi Arabia has been capped by law and hence remuneration does not represent a high risk.

The corollary of this for boards and management of EM firms wishing to attract foreign capital, is that they need to report on the information that institutional investors are seeking, even on issues that they may consider material or that are not required by domestic ESG regulations. The flexibility provided by the comply-or-explain (CoE) approach provides a possibility to address these criteria and concerns.

EM companies can use CoE not only as a mechanism for communicating to their own regulator and the local public, but also as a means of explaining to foreign investors why certain global governance standards may not be fully relevant. Explaining how a firm has gone above the national governance regulation can also be of benefit for all investors, as it demonstrates that the board does not take a minimalist, compliance – driven approach to governance.

Likewise, a demonstration by a firms’ reporting of how it has adapted its governance framework to the risks it faces geopolitically, financially and operationally is key. In doing so, EM firms can benefit from drawing a better connection between their strategy and their ESG practices. Boards and management need to stop considering ESG as E & S & G but instead as interconnected pillars of their corporate strategy.

The GOVERN Center works with boards and senior executives of leading EM companies to develop its governance practices in support of better financial performance and investment attraction. For more information: email:

Moscow Exchange partners with Closir to enhance corporate acces

London, 2 April 2019

Closir, a leading corporate access technology platform, today announced a strategic partnership with Moscow Exchange. Moscow Exchange will be using Closir’s technology to provide global investors with access to management of its listed companies during its well-established series of MOEX Forums in Moscow, London and New York.  These forums provide global investors with unique insights into the Russian market as well as the opportunity to meet with leading Russian companies.


Closir is a technology platform which connects listed companies in emerging markets to institutional investors including mutual funds, sovereign wealth funds, pension funds and hedge funds allowing them to organise meetings, roadshows and virtual conferences. Closir extends the reach of companies throughout Europe, United States and Asia.

Commenting on the partnership, Closir’s CEO Michael Chojnacki said:

“From an investor relations and corporate access standpoint, MOEX has long stood out as one of the most proactive and innovative exchanges not only in emerging markets, but globally. We are glad that MOEX has selected Closir to build on this culture and introduce a technology solution to a rapidly changing industry.”

Anna Vasilenko, Head of Primary Markets at Moscow Exchange, added:

“MiFID II regulations that have been rolled out in Europe and increasingly adopted in the US have impacted how corporate access is consumed by investors. Our partnership with Closir will provide investors from around the world with easy and efficient direct access to Russian companies during the forums, and it should help to drive awareness and attract additional investment to our markets.”

The first MOEX Forum in 2019 will be held at the Ritz Carlton in Moscow on 3-4 April, featuring management teams from over 45 listed Russian companies as well as keynote speakers including Elvira Nabiullina, Governor of the Bank of Russia, Maxim Oreshkin, Minister of Economic Development of the Russian Federation and Kirill Dmitriev, CEO of Russian Direct Investment Fund.  MOEX Forums in London and New York will be announced later this year. To request more information or 1:1 meetings with listed companies please email

About Closir

Closir is a leading financial technology company which provides products and services that help listed companies in emerging markets to attract global institutional investors. Closir operates an online platform which allows these listed companies to raise awareness of their investment story and to target and connect directly to investors in Europe, North America and Asia. Closir is a founding member of Innovate Finance, a UK government body promoting innovation in financial technology. For more information about Closir, click here.

About Moscow Exchange

Moscow Exchange provides exhaustive and convenient access to the Russian financial markets. The Exchange's markets offer clients trading opportunities across a diversified range of asset classes all combined with best-in-class post-trade services. Today, Moscow Exchange is the main liquidity and price discovery centre for Russian instruments. Moscow Exchange hosts trading in equities, bonds, derivatives, currencies, money market instruments and commodities. The Group also includes Russia's central securities depository, the National Settlement Depository, and the National Clearing Centre, which performs the function of central counterparty. Moscow Exchange ranks among the world's top 20 exchanges by total capitalisation of shares traded, and also among the 10 largest exchange platforms for bonds and derivatives trading.

What investors expect from an IR website?

The investor relations section of your company website serves two main objectives; for new investors, it is an introduction and pathway to investing and a useful accessory for those who already know the company.

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There are six components of the website that all investors will require:

  1. Annual Report: the starting point for understanding the company is annual report. Being able to quickly and easily navigate the site to download this document is important.

  2. Investor Presentation: an updated presentation containing overview of the business, the sector and the latest developments.

  3. IR Contact: this gives investors an easy way to request calls and meetings with the IR team/management. Equally important is to ensuring that those requests are responded in a timely manner.

  4. Easy access to numbers: quick and easy access the latest financial statements.

  5. News flow and updates: archive of most relevant news stories impacting the equity story of the company.

  6. IR calendar: list of events that investors find important: earnings date, conference calls, roadshows, conference participation, capital market days, filed trips etc.

Other useful sections include:

  1. Basic overview of the business

  2. Shareholder structure

  3. Management and board biographies

  4. Dividend Policy

If you would like us to review and rate how investor friendly is your IR website, simply click below.

IR Website Review

Please fill this form if you’d like the Closir team to review your IR website and provide you with feedback on how it can be improved. This service is only available for listed companies in emerging and frontier markets.

Name *

Benefits of an Investor Relations Association

An active Investor Relations (IR) Association or a Society can greatly support healthy development of a country’s or region’s capital market. A listed company’s ability to communicate its investment story in a transparent way and give access to its management team are the two fundamental pillars of IR. For global fund managers, who manage billions of dollars of capital, those two pillars play a key role in their investment decision process. Hence a local IR industry will, over time be closely linked to its ability to attract capital from the global markets, in both equity and debt form.

While the set-up of individuals societies and associations vary from country to country, they broadly aim to achieve the following:

  1. Raise the awareness of the benefits that IR can bring in attracting capital (and reducing its cost)- from both micro (company) and macro (capital market) perspective.

  2. Provide its members a training and professional development programmes to further develop IR skills in line with global best practice.

  3. Represents its member views to regulatory, the investment community and government bodies.

  4. Regularly acknowledge and award best practice IR teams.

  5. Provide a forum for networking for professionals in the industry and provide links to other IR Societies globally.

Setting up such a Society in a new market requires the interest and commitment from the broader capital market as well as dedicated set of resources to build out a value offering for future members. The following steps and questions asked can be useful in the early considerations:

  1. Set the scope of the future Society. Earliest discussions need to specify the exact purpose of the Society, what will it try to achieve in the short, medium and long term. Which out of the 5 value points above is the market lacking the most?

  2. Create a core executive team. Who will be responsible for progressing the agenda of the Society, keeping track of metrics and progress, and act as the public face of the organisation while its being formed? Who else needs to be involved and “buy-in” for the initiative to be successful?

  3. Raise seed capital from founders and early sponsors. The executive team needs to plan initial capital requirements which may include: salary for first General Manager (GM), first operating expenses, marketing collateral including website, first three Society events.

  4. Create a membership offering for corporates and advisors : The GMtogether with the executive team is responsible for creating a value proposition for listed companies and advisors which it then markets in its community.

  5. Organise the first conference and awards ceremony: The first conferences aims to capture the attention of all of its members and addresses key topics and trends in IR, both locally and globally. It invites global experts to share their perspectives through presentations, panels and case studies. An awards ceremony awards best practices in IR (this is best done when conducted through an independent survey, such as Extel).

  6. Year 2: Create a training offering (e.g. 2 day IR training course twice a year). This can be done together with external partners such as UK IR Society, which conducts training for number of other Societies.

  7. Further developments: The Society create committees which involves more members of the community to be part of the Society (e.g. by forming membership, regulatory, events, private company committees). Those committees are responsible for adding depth to the membership offering and further broadening its scope. Separate to the executive team the Society forms its governance and control committee which is responsible for audit, financial affairs, conflicts of interest etc.

Basics of MiFID II

MiFID 2 is the revised “Markets in Financial Instruments Directive”, a broad set of European financial regulations that came into effect at the start of January 2018.

The original MiFID came into force in November 2007, just before the financial crisis. Its main intentions were to foster greater integration within Europe’s financial markets and to drive down trading costs, primarily for equites. The regulations also resulted in the creation of so-called multilateral trading facilities (such as Chi-X or Turquoise), which allowed equities of listed companies to be traded for the first time on platforms independent of large national exchanges, thus introducing competition and lowering the cost of trading.

Three years after the launch of MiFID, the European Commission (the executive arm of the European Union) began work on MiFID 2. The EC was keen to develop the existing legislation to build in lessons learnt from the financial crisis and to broaden its scope to encompass other asset classes. Simply put, the goal of MiFID 2 was to provide greater protection for investors and increase transparency throughout the capital markets.

Though the regulations do not specifically address listed companies (either inside or outside the EU), they dramatically impact the prevailing investment research and corporate access models offered by investment banks to institutional investors, which has significant knock-on effects for companies globally.

Perhaps the most relevant issue for IR teams that MiFID 2 seeks to address is how asset managers pay for research on companies and meetings with management, which they use to help them make investment decisions. Until now, asset managers received research, including written reports and phone calls with analysts, for ‘free’, i.e. the cost of this service was built into trading fees, which were often paid for by the fund managers’ clients. Conferences, roadshows and investment trips worked in a similar way. For the first time, fund managers are having to budget separately for research, corporate access and trading execution (something known as ‘unbundling’).

Faced with having to pay for these services themselves for the first time, investors are already becoming more selective in terms of what they consume. While it is still too early to understand the full impact of the new regulations, early indications point to an overall reduction in traditional research coverage and an increasing reliance on buy-side analysts over sell-side analysts. On the corporate access side, a decrease in investor attendance at broker-organised conferences and company roadshows seems inevitable, as investors look for more cost-efficient ways to study companies.


Main goals:

  • To make European markets more transparent and efficient;

  • To restore confidence in the capital markets following the financial crisis;

  • To move over-the-counter trading of various asset classes to established trading venues.


  • All 28 European Union countries;

  • A vast array of asset classes: equities, fixed income, commodities, currencies, futures, ETFs, retail products such as CFDs.

Who does it effect:

Almost everyone:

  • Companies in EU countries;

  • Companies in non-EU countries that operate in, or have investors in, the EU;

  • EU fund managers;

  • EU pension funds;

  • EU retail investors;

  • Indirectly (and to a lesser extent) fund managers in the US and Asia.

What does it mean in practice:

  • Unbundling of payments for research/corporate access from trading execution;

  • Introduction of volume caps for dark pools of equity;

  • Greater pricing transparency for OTC and off-exchange markets;

  • Tougher standards for financial and investment products.

Q&A: MiFID II and impact on Investor Relations

One of the more high profile aspects of the MiFID II legislation that came into effect across Europe last month concerns how asset managers pay for research and corporate access — two costs that were in the past, in one form or another, built into trading fees.

In this Q&A, we wanted to share some of our thoughts in response to a number of frequently asked questions we have received from our clients on this topic during the last few months. We also wanted to share a few easy-to-implement, practical tips for investor relations teams to consider going forward.

How has the market been preparing for MiFID II?

In line with its goals of greater transparency and accountability, MiFID II makes it clear that the onus is on the buy-side to pay a proper value for ‘substantive investment research’, the free provision of which would be considered an illegal ‘inducement’ to trade with a particular broker.

As such, investment managers in the EU were confronted by four key decisions in 2017:

1. How much research is worth, and how much they would be willing to pay for it.

2. What total budget they should allocate for research.

3. How this budget should be funded (i.e. whether the costs should be covered by the fund or passed on to its clients).

4. Which providers they would buy research from.

The MiFID II preparation process has had two main effects. The first is that, as a result of this ‘unbundling’ of research and trading execution fees, a new market has been created around paid investment research, with its own market-driven pricing model. The second effect is that many investors have already dramatically reduced the number of brokers from whom they purchase research, now that they cannot obtain it freely from all providers.

The same effects are apparent (with some notable differences and exceptions) for corporate access. Conference attendance, company meetings and group lunches hosted by third parties with trade execution capabilities all count as inducements, so must be paid for by investors. In practice, this means that investors are no longer able to accept company meetings from the sell-side unless either they are already clients of the organising broker, or unless they pay a separate fee, which many have expressed a reluctance to do. As with much new legislation, there are still some areas of uncertainty, for example whether it is ok for a broker to invite non-clients to a meeting at the company’s explicit instruction; some investors are choosing to err on the side of caution for now by refusing sell-side invitations where there is no existing relationship, but this question (and many others) will no doubt be ironed out during the coming months. 

What is the impact of MiFID II on investor relations teams?

While it may still be too early to draw many conclusions (and the regulations will almost certainly impact companies of different sizes and in different markets to varying degrees), two universal themes seem to be emerging:

1. Investors will be increasingly reliant on IR teams to complement their own research

The strategic importance of company investor relations teams will grow as a direct engagement model with the investment community emerges. Quality IR staff will be increasingly sought after by investors, and rewarded with greater responsibility and recognition as their efforts become more explicitly linked with the fair value of the company.

2. Companies and investors will need to fill any gaps in corporate access coverage themselves

Investment banks will continue to play an important role in providing corporate access services both to companies and investors. This being said, gaps in coverage will inevitably begin to emerge and widen, resulting in a reduction in the quantity of investor/company meetings. Both sides will need to take up the mantle and fill the gaps themselves if they want to stay on top of meeting opportunities and other relevant developments.

A recent IR Society/Quantifire survey seems to validate this. Over half of the buy-side institutions surveyed believe they will rely more on companies contacting them directly for meetings during the coming year. Some have even reached out to companies to encourage them to take a more proactive approach.

Will institutional investors build out their own corporate access capabilities?

Institutional investors are already starting to take a more consistent and structured approach to corporate access. Many are quite far along in this process and have set up their own dedicated corporate access desks to track consumption, monitor meeting opportunities and proactively manage outreach to companies throughout the year. For fund managers and analysts, corporate access extends far beyond face-to-face meetings during conferences and roadshows: it encompasses all opportunities to interact – from requesting or joining a call to discuss a change in the company’s strategy, to validating an assumption in a financial model, to attending a site visit in a remote location or requesting to join a capital market day – thus it must be measured and managed effectively.

How will the independent research model evolve?

There are two main models of independent research which both continue to grow and evolve, offering an increasingly popular alternative to traditional sell-side research.

The ‘investor pays’ model allows independent research providers to compete on the same playing field as traditional investment banks. A number of buy-side institutions have started to send out research tenders to the market (sometimes even announcing them on their websites), with anyone eligible to participate. Typically independent analysts must have enough of a focus and expertise to differentiate their offering from established sell-side players, and also to be able to provide bespoke reports on request.

The ‘company pays’ model also continues to grow and attract more interest, especially from companies who have suffered from a loss of sell-side coverage during the last few years. ‘Company pays’ research (which is typically free for investors) tends to be factual, providing an editable financial model and staying clear in most cases of recommendations. Marketplaces which aggregate research have already started to emerge, simplifying the consumption process for the fund manager.

What about consensus management?

As investment research becomes less ubiquitous, there is growing concern in the investor relations community about how consensus estimates will be managed going forward. The paucity of meaningful ‘consensus’ (analyst average) estimates could have an adverse effect on stock price volatility, something highlighted by a recent UK IR Society survey. 69% of respondents anticipate changes in how they collect consensus post MiFID II; 43% of these respondents would not be inclined to trust data from third party aggregators, with another 45% believing that small- and mid-cap companies will not have enough data points to generate any sell-side consensus at all.

Is there a role for stock exchanges to play to address some of the challenges?

There’s little doubt that up until now companies have tended to rely heavily on brokers for investor access element of their IR strategies. Although the potential void created by MiFID II will increase the pressure on companies to be more proactive, it also creates other opportunities for collaboration, which may be more healthy for the long-term growth and cohesion of the capital markets.

Exchanges in particular may be able to play a more direct role in supporting and guiding companies through the changing landscape. There are many examples of this already happening. To use emerging markets as an example, Moscow Exchange, Dubai Financial Market, Borsa Istanbul and Warsaw Stock Exchange (amongst others) already organise regular investor conferences for their listed companies in major financial centres. Exchanges throughout the EU are starting to explore new ways of forging formal and informal partnerships to ensure that research and information continue to be widely available throughout the marketplace, especially for mid- and small-cap companies.

Some exchanges have set up dedicated internal teams to continue to support companies in the weeks and months following the completion of a transaction. There are also significant opportunities for exchanges to lead discussions around independent research, consensus management, investor events, and IR advisory services. This can only be a good thing both for companies and investors.

Does Brexit impact MIFID II implementation in the UK?

The short answer is no. The UK financial regulator (the FCA) made it clear that until the UK formally withdraws from the European Union (in March 2019), existing EU laws such as MiFID I will continue to apply, and firms should continue to implement all new EU legislation such as MiFID II. It is also possible that the UK will decide to keep MiFID II legislation largely intact even after it withdraws from the EU.

Would these changes have happened without MiFID II?

MiFID II regulations have accelerated and amplified a number of underlying trends which have been developing in the capital markets for several years. These include:

  • An increase in the amount of off-exchange trading, e.g. through MTFs, dark pools and other electronic trading, which has contributed to a drop in trading revenues for the sell-side, reducing the pool for corporate access and research;

  • A decrease in the number of IPOs following the global financial crisis, placing a further strain on sell-side revenues;

  • A consequent reduction in the size and scope of analyst and sales teams as the sell-side focuses on large-caps/highly liquid companies/main index constituents;

  • A steady increase in the number of investors with global mandates, and in the number of markets opening up to foreign investors for the first time;

  • The rise in popularity of ETFs, which has led to outflows from traditional active funds and caused asset managers across the board to cut costs.

Some easy-to-implement, practical tips for IR teams

Based on our conversations with company IR teams and investors, we have tried to pick out a few best practice suggestions for companies to follow:

  • Keep track of your meetings with shareholders during the course of the year and identify shareholders with whom you have had no contact in 8–12 months. Find out if meetings with these investors can be organised by your analyst or corporate access coordinator.

  • Publish your conference participation and roadshow schedule on your IR website calendar.

  • Publish upcoming roadshow plans on the last page of your investor presentation.

  • On your IR website, clearly display the name, email address and telephone number of investor relations team members who are available to answer investor questions.

  • If feasible, add some additional individual and/or group meeting slots to your roadshows for any investors who are not included in the schedule but may still be interested in meeting you.

Review of BCG’s Asset Management Survey

We had a chance to take a look at the Boston Consulting Group’s annual asset management survey which landed on our desks last week. Each summer the consultancy takes a fairly deep dive into the industry’s overall state of health and reviews its overall performance, as well as discusses emerging products and competitive trends. A few things we found particularly interesting:

  • For the first year since the 2008 financial crisis, revenue earned by asset management firms fell globally in 2016 along with profits. The biggest squeeze in margins come from those ‘in the middle’ i.e. from asset managers without large scale or a niche focus.

  • Global assets under management increased by 7 percent to $69 trillion, however most of that growth came from rising markets rather than new inflows which held steady throughout the year.

  • One area of growth area that particularly stands out is China, where the asset management industry is still relatively underdeveloped. The country’s assets under management increased 21 percent in 2016, mostly driven by net new inflows. Rising levels of household wealth, along with the development of insurance companies and pension funds, offer the potential for further gains in the coming years. Foreign companies, for whom the barriers to entry to the Chinese market are gradually disappearing, could stand to benefit from this trend.

  • Passive strategies were the largest driver of net fund flows in the US, where the industry is dominated by a few large players (the top 10 firms captured almost all of the inflows). This ‘winner takes all’ trend was less pronounced on the active side of things, where the 10 top firms captured 58% of net inflows.

  • Despite the faster growth of AuM in passive products, passives’ contribution to managers’ revenue pools “remains small.” Revenues from passive mandates grew from about $6 billion in 2008 to $14 billion in 2016, which only represents 6% of the industry’s global revenues. Even though various forecasts suggest passive investments could overtake active by 2021 (in terms of AuM), revenues will likely only reach around 7% of total revenues during the same period.

  • The asset class that has proved to be the most stable during the last few years is alternatives. Even though alternatives only accounted for 15% of AuM in 2016, they made up 42% of total revenues. The next two strongest contributors were active specialties as well as solutions and multi assets.

The survey concludes that growth in the industry is still possible, however only through a combination of M&A, cost management, and crucially, technology innovation.

Understanding Active ETFs

In previous blog posts we’ve discussed at some length a number of trends relating to ETFs and their impact on today’s fund management landscape. The increased interest of institutional investors, combined with an already strong retail uptake, has helped ETFs to grow further in popularity during the first few months of the year. In recent weeks, a number of large players known more for their active management, including Fidelity, Pimco and Eaton Vance, have launched or are planning to launch active ETF funds.

A quick recap:

  • Assets Under Management in ETF form now stand at over $2 trillion dollars, representing a ten-fold growth over the last decade. In terms of equity, ETFs make up around 25% of mutual fund size, and up to 30% of all daily trading volume on US exchanges. Turnover of actively managed mutual funds is on average 10x that of passive funds.

  • Perhaps surprisingly to some, active managers are amongst some of the largest users of ETFs, utilising them for hedging, cash management and to achieve ‘instant’ exposure to sectors and geographies in which they are underweight, or lack sufficient stock picking expertise.

  • ETFs are still very US equity-centric, with 56% of the global total focused on broad US coverage and roughly 20% US sector-focused, with only about 17% covering global equities.

  • The number and scope of Emerging Market ETFs has also expanded over the last three years, despite volatility and recent outflows. In the first quarter of this year, Emerging market equity ETFs saw hefty redemptions of $12.6bn in the first quarter amid concerns that any further rise in the US dollar will hurt future returns. The largest two are Vanguard Emerging Markets ETF and iShares MSCI Emerging Markets Index Fund.

  • There is a direct correlation between market volatility (as measured by the VIX index) and ETFs as a percentage of total trading volume.

  • The growth of the ETF industry has given birth to new products and investment strategies, as well as a new set of industry jargon, including Actively Managed ETFs, Smart Beta and Robo Advisors.

Actively Managed ETFs

The easiest way to think about active ETFs is as mutual funds wrapped in an ETF structure, allowing investors to trade intra-day and pay lower fees. There are approximately 125 actively managed ETFs (with AUM of $19bn), with the majority focused on fixed income and macro asset classes. There are 45 global (i.e. non-US) active ETFs. The numbers are still fairly low, relatively speaking, and advisors are questioning whether it’s the wrapper, the fees, or the performance of the ETFs themselves which are most to blame.

Active ETFs are designed to offer investors the benefits of ETFs, which include continuous trading, a low expense ratio and a number of tax advantages, while adding an active management component. The goal of an active ETF is to outperform its index.

One of the key differences between mutual funds and active ETFs is transparency. Unlike mutual funds, active ETFs are required to reveal their holdings on a daily basis.

This has been a concern to traditional equity managers, who prefer to keep their buying and selling intentions shielded from Wall Street traders. Publicising trades to the market can allow other market participants to front-run trades and erode returns.

The SEC is considering whether or not to allow actively managed ETFs to keep their trading secret, and has already allowed Eaton Vance to launch a series of non-transparent products that will mirror the firm’s mutual funds. Additional structures are proposed in the market which we will cover on another occasion.

Another key difference is the flexibility of the product and ability to hedge. Active ETFs can be traded at any point in the day, mutual funds only at the close. ETFs also offer investors additional ways to generate yield, returns and hedge. For example, unlike mutual funds, ETFs allow investors to short shares, buy on margin, lend and include options such as buying calls or puts.

Active ETF fees are higher than for traditional ETFs, but still lower than for mutual funds. This is because many mutual funds have distribution and service fees, and transfer agency fees, as well as trading costs associated with inflow/outflows. Active ETFs may also continue to put pressure on active mutual fund fees going forward.

Top 15 actively managed US ETFs with over $100m in Assets

While actively managed ETFs present some new challenges for the market, they undoubtedly offer new opportunities for diversified investment. For IR teams it is a space worth carefully observing.

Sources: Institutional Investor, Goldman Sachs Research,

The rise of alternative funding and implications for the effectiveness of investor relations

The value of assets managed by the global investment management industry and the amount of assets that sit within global mandates continue to rise year on year. Research from PwC predicts that global assets under management will rise to $101.7 trillion by 2020, from roughly $70 trillion today. This will be primarily driven by pension funds, high net worth individuals and sovereign wealth funds, all of whom have been steadily increasing the global component of their investment portfolios.

Tapping into this capital efficiently, however, is far from straightforward for global issuers. As a result there has been a surge of interest in alternative funding methods and new technologies, which aim to boost speed, efficiency and transparency throughout the capital markets. Where exactly is the impact likely to be largest for investor relations teams?
Tapping into this capital efficiently, however, is far from straightforward for global issuers. As a result there has been a surge of interest in alternative funding methods and new technologies, which aim to boost speed, efficiency and transparency throughout the capital markets. Where exactly is the impact likely to be largest for investor relations teams?

Supply-demand matching

First, we can expect to see improvements in how companies target investors. Currently the tools for efficiently understanding who is interested — and to what level — in a given investment story, whether on a deal or non-deal basis, do not exist today. Technology drives the matchmaking process across a multitude of industries. The finance industry has arguably been one of the slowest to embrace its potential to improve the process for the 40,000-odd listed companies and more than 100,000 institutional investors. Potential benefits include increased accuracy of targeting, a greater degree of access and control, reduced cost and a more diversified range of options.

Peer-to-peer funding platforms for listed companies

Second, we can expect improvements in how companies reach and engage new pockets of liquidity, especially within the retail investor segment. Investment-based “crowdfunding” (or market place investing — both equity and debt) has existed in limited forms for several years through online sites that allow investors to invest in specific projects predominantly for private companies. This model allows companies to raise capital to fund new ideas and more importantly, cultivate new clients who now feel they are participating in the growth of their businesses.

These new marketplaces may work in tandem with existing processes. The crowdfunding platform SyndicateRoom has revealed a tie-up with the London Stock Exchange that will allow ‘crowdfunding investors’ to participate in initial public offerings and placings on the main market of the LSE and AIM.

Blockchain applications

Third, we can expect vast improvements in efficiency and transparency in a variety of shapes and forms. One such form will be Blockchain technology applications within the equity and debt capital markets, which aim to tackle the vast inefficiencies which adversely affect the industry today through a centralised, digital ledger.

The scope of Blockchain’s pilot projects in this area has grown exponentially over the last three years. While these projects have so far generated more hype than tangible applications, the benefits that ‘distributed ledger’ technology can bring to the broader industry seem appealing enough to continue with its funding and development. The prize on offer, as one consultancy recently put it, is a new architecture, where all capital market participants work from common datasets, on an almost real-time basis, and where supporting operations are either streamlined or made redundant.

To take one example of what is already being done, BNP Paribas has designed a pilot scheme permitting private companies to issue securities on a primary market with e-certificates, developing a ‘live’ share register and access to a secondary market all via blockchain technology. We should expect similar progress in the near term in public markets, with increased accuracy in the identification and recording of shareholder movements and interactions.

Initial Coin Offerings and fundraising

Lastly, in niche areas, we can expect new blockchain based applications to support the fundraising process. Initial Coin Offerings (ICOs) are a fundraising exercise for cryptocurrency tokens such as Bitcoin or Ethereum, and have received a lot of press in recent months. Speculators continue to chase this new asset class. While these might at face value seem like attractive fundraising structures, they are ultimately of limited interest in a corporate context. The recent moves by the SEC (stating in July that cryptocurrency tokens can be securities) and China (banning fundraising through ICOs in early September), mean that an ICO is unlikely for the time being to work in an established corporate outside of a new tech startup scenario.

For IR officers, there are nevertheless some newly emerging areas of interest which are raised by the cryptocurrency experience.

  • ICOs have turned the traditional fundraising process on its head, marketing for a long time then fundraising in a matter of hours. The co-founder of Ethereum said “We managed to grow our base of ambassadors by attending meetups around the world, targeting groups and leaders in certain communities. Once they got on board… about 9,000 people participated in the crowdsale”. Might traditional equity capital raising follow this in certain circumstances, for instance where the fundraising is well flagged? For instance, a company with a well-prepared public market-style equity story can spend time educating potential target investors for up to two years pre-IPO. The public phase of the IPO could then be significantly cut.

  • The rise of cryptocurrency as a liquid means of exchange, irrespective of the underlying use-case, suggests that corporates could treat cryptocurrency as one of the currency options for the fundraising. In August this year, Fisco used a 200 bitcoin 3-year bond (worth $860,000 at the time) for an internal M&A transaction, as a test case with Japan’s approval of bitcoin as legal tender.

  • Primary transaction processes are slow, and investors who are not existing clients of the banks managing the deal are usually not able to participate. Blockchain authentication of the investors’ know-your-customer (KYC) status would broaden the addressable investor base. And this is just one application. In July this year, Daimler used a private version of Ethereum in a test case to issue a €100m 1-year bond. This used Blockchain to manage the whole transaction cycle from origination, distribution, allocation and execution of the loan agreement, to the confirmation of repayment and of interest payments.

The journey from today’s system to a new paradigm for our industry will take time. The obstacles to be overcome along the way may be significant, and it is far from clear what will ultimately emerge. However there is little doubt that technology will eventually transform our industry faster than we think. We can take clues as to how this may happen from examining just how communications, music, transportation, or even video rental industries have been transformed in the last 5 years alone. As in those industries, the finance industry will come face to face with huge opportunities, the beginnings of which we can see today.

The article was co-written by Michael Chojnacki from Closir and Julian Macedo from ECM Team and originally appeared in fall edition of IR Society’s Informed magazine.

Key takeaways from FundForum 2016

Earlier this week, over 2000 global investment and wealth managers came together at the annual Fund Forum in Berlin to discuss the main trends affecting the industry. Although the scope of the discussions was broad, there were a number of topics which were at the heart of many of the debates and conversations throughout the 3-day event.

Here are our top 5:

Robo-advisors and technology

Tom Brown, Global Head of Investment Management at KPMG, segmented the issue of technology and digital disruption in the asset management industry into three main areas: customer experience, operational efficiency and the use of technology to manage money.

Robo-advisors — online wealth management platforms that provide automated portfolio management advice without the use of human financial planners — are perhaps the industry’s best example of all three points rolled into one. While the technology is still relatively new, use of robo-advisors has been growing exponentially, especially amongst the younger generation, which today prefers to view and manage its pension savings using a mobile app rather than going into a bank branch.

A number of traditional asset managers have equity stakes in robo-advisory platforms, aiming to strike a balance between traditional and technology-based approaches under the umbrella of an established, credible brand name. Others argue that artificial intelligence and machine learning will eventually lead to the demise of the fund manager entirely, the argument being that machines can do what humans can do but better. Consumer behaviour will adapt to the new environment as it always has done when presented with innovative leaps forward such as self-service checkouts, online interactions and soon, driverless cars.


In October last year The Economist devoted their cover story to Blockchain: “The trust machine: how the technology behind bitcoin could change the world”. In simple terms Blockchain is a digital, trusted, public ledger that everyone can inspect, but which no single user controls. It keeps track of transactions continuously, for example ownership of a diamond, rare painting, or piece of land.

The asset management industry continues to debate the potential applications of this technology, which started out by powering Bitcoin. In a panel moderated by Lawrence Wintermeyer, CEO of Innovate Finance, ideas ranged from Blockchain’s applicability in areas such as post-trade environment, collateral and liquidity management, regulatory reporting, and the handling of know-your-client (KYC) and anti-money laundering (AML) data. In each instance success will require close collaboration amongst the various parties involved.

Brexit and Trump

Mohamed El-Erian, Chief Economic Advisor at Allianz, addressed some of the shifts that are giving rise to the anti-establishment movements seen in many developed countries today.

“The common element throughout all these things,” he explained, “is that the advanced world has lost the ability to grow in a fair and inclusive manner, and when that ability is lost and people lose confidence, things start going wrong.”

El-Erian stressed that global growth to unlikely to be consistent and stable any time soon, thus the risk of non-normal distribution of events affecting the markets is always an issue. Secondly, he highlighted central banks’ inability to rein in financial volatility, which remains as frequent and unpredictable as ever.

The discussion centred on the fact that investment managers should try to adopt new framework about how they think about risk, and acknowledge that market events in both developed and emerging markets no longer follow a normal distribution curve.

Is ‘data’ the new gold?

A number of panels focused on the industry’s ability to understand and utilise the unprecedented amounts of data that are generated by each one of us in the digital world.

“By 9 o’clock each morning we have already created more data than mankind created from the beginning of time to the year 2000” said Andreas Weigend, former Chief Science Officer at Amazon.

“Because of the signals you send through sensors, microphones, GPS, gyroscopes and cameras, your phone knows almost everything about you: where you are walking and even how you are walking — it probably knows more about you than know yourself”.

Crunching and refining data such as these enables the industry to improve and tailor its products a lot more to client needs.

Costs and Transparency

The new European MiFID rules are due to take effect in early 2018 and will require funds to give more information on costs in their fund factsheets.

EU and UK regulators are demanding fairer and more transparent fees from fund managers in a bid to ensure greater transparency and accountability to investor clients. As discussed in previous blogs, as part of this process they are also assessing which costs should be borne by the asset manager and which can be passed on to the end client through management fees and commissions.

The new regulatory environment is forcing asset managers to rethink a number of elements of the traditional business model, such as how they consume and pay for investment research.

With technological innovation comes regulatory oversight. Those able to react quickest to the dual challenges of new regulations and market unpredictability are most likely to succeed.

Framework of a Successful Corporate IR Strategy

Over the last couple of years we have witnessed a number of significant themes and developments in the capital markets, which have had an meaningful impact on how IR teams think about strategy today. Whether we examine global pension fund reforms, regulatory developments affecting institutional investors and their products, or consider the role that technology plays within the financial industry, we quickly realise how important it is for us not only to understand these themes, but also be able to assess the impact they can have on our strategy.

How do successful companies think about an IR strategy in a rapidly evolving market? A simplified framework, inspired by award winning practitioners, with a few supplementary questions, may provide some clues.

Prioritise your objectives

A good starting point in the planning process is to ask a fundamental question: what are the objectives of the IR team at your company this year? Those objectives should be as measurable as possible and revolve around creating and communicating your equity story and setting it within the context of attracting investors.

The objectives are designed to be carefully prioritised and regularly revised. Crucially every IR team member understands the specific role they play in accomplishing them and has a clear view of the definition of success. A discussion around priorities, both short and long term, often sets the tone for the remainder of the planning process.

Things to consider:

  • Does everyone on my team possess a clear understanding of his or her individual role in executing the strategy?

  • Have I communicated my plan to the main internal and external stakeholders?

  • Are my objectives also laid out alongside a calendar of key dates in the corporate IR calendar, as well as investor conferences, and non-deal road shows?

Enforce the key messages of your investment case

This part of planning involves taking stock of all market and company specific events of the previous year and crafting a succinct equity story. Second, it involves highlighting and articulating the most important elements that you would like to convey to the investment community. And the ‘how’ is often as important as the ‘what’. The most successful IR officers are in fact magnificent storytellers. They understand the competition of investor, analyst and media attention is strong — and with this in mind craft stories that are compelling, unforgettable, smart and often magnetic. They are able to answer the crucial question investors are asking: What makes this company so special?

Things to consider:

  • What macro or mega industry trends is my company’s equity story continually benefiting from?

  • What are the key non-financial metrics that matter in my story?

  • How are the main messages I want to convey to the market reflected in my investor material?

  • When was the last time I practiced a simplified two-minute “elevator pitch”?

Create a solid capital market toolbox

Many companies will attest that it is a vital exercise to discuss what available capital market tools would be most beneficial to help them achieve the objectives they have set out. The process often includes ensuring your collateral (composed of, say, an investor pack and presentations, one page fact sheet, management videos on strategy, IR website) is up to date and reflects the messages you want to convey to your investors and analysts. The choice of the toolkit will go beyond regulatory obligations you need to meet, and depend on the size and make-up of your current and envisaged shareholder structure and the level of analyst and media coverage your advisors can offer. Commitment on resources and budget is also essential.

Many savvy companies carefully monitor and research new tools and technologies that are being introducing to the IR marketplace. Throughout the year, IR Society and Investment Association conferences, as well as leading industry periodicals and surveys, provide good insights into this space and also into new tools.

Things to consider:

  • Do I have a complete view of the resources available to me (internal and external to my team, as well as those provided to me by advisors)? Are those resources satisfactory?

  • Have I created ample opportunities to identify any improvements or challenges to the toolkit so that periodic adjustments can be made?

  • Have I considered how technology based tools in the IR space can help me achieve my objectives?

Understand your investor opportunity

Often at the heart of an IR strategy, many companies take a technical, if not scientific, approach to identifying investor opportunity. A starting point is a comprehensive analysis of your own shareholder base factoring in significant movements over the past four quarters. Next, an institutional investor analysis of peer group, country/region and industry (adjusted to account for company’s size, fundamentals and liquidity) can provide a solid foundation for an investor targeting exercise. If possible, adding to this an overlay, which takes into account the latest fund news and developments, new fund launches and significant asset rotations, can be a useful part in your company’s opportunity map.

Things to consider:

  • Have we segmented our institutional investors and our targets? Do we understand their expectations and our approach to servicing them?

  • Am I confident that my non-deal road show and conference schedule sufficiently addresses the identified investor opportunity?

  • Do we understand the reach of equity sales teams within the brokerages that write research on my stock?

  • Are we spending enough time asking questions to investors and listening to what they have to say? How are we digesting those insights and feeding them into management/board? What other tools are we using to gauge perceptions from the buy and sell side?

Stay ahead of big picture trends

How is the capital market going to look in 2020? What investment products are growing in popularity today, and which ones are ebbing away? Which investment products have been receiving the most inflows over the last three years? How are new technologies affecting trading, capital raising and asset management industries? What impact will the current wave of regulation have on our closest counter-parties? What is influencing Asian investor behaviour and their appetite for diversifying their portfolios outside of domestic markets?

These are certainly fascinating questions, which will no doubt play an important if not transformative role in how the IR profession will look a few years from today.

Things to consider:

  • How do I stay up-to-date with global trends affecting my industry, the wider capital market and IR best practices?

  • Are capital market insights regularly shared and discussed across my team?

  • Does my reading list this year contain an in-depth study of at least one important capital market topic, new culture or global theme?

Have IR professionals lost their enthusiasm for social media?

This is a guest blog post from Sandra Novakov, a Director with Citigate Dewe Rogerson’s Investor Relations practice. Citigate Dewe Rogerson is the leading international consultancy specialising exclusively in investor relations, financial communications and corporate public relations.

Citigate Dewe Rogerson conducts an annual survey into investor relations trends across Europe and one of the topics which has yielded somewhat surprising results this year is the use of social media in communications with analysts and investors.

Looking back two years, when social media channels were expected to have a profound impact on the dynamic of communication between companies and their investors, it seems excitement levels have since dropped significantly.

The findings of our survey show a decline in the popularity of social media when it comes to five out of eight IR activities shown in the figure below. Whilst nearly all companies used these channels to publicise news and events in 2013, this figure has now dropped 26 percentage points, to 65%. Another notable change can be seen in the popularity of IR blogs — only 12% of IR teams use these to promote their views against 23% in 2013. So this is, somewhat ironically, an IR blog about the declining popularity of blogging in IR.

Looking at trends in other IR activities, one thing is clear. The declining use of social media by IROs is by no means indicative of declining engagement levels with investors. When it comes to roadshow activity, 46% of companies are planning more meetings in 2015 compared to 2014. In particular, following several years of focus on continental Europe and Asia, there is a clear shift towards targeting US investors in 2015. In response to declining broker support when it comes to corporate access as a result of tightening regulations aimed at preventing fund managers from using dealing commissions to pay for services outside of research, companies are also taking greater control of investor targeting — only 5% rely solely on brokers and 24% are investing in either targeting tools, personnel, or both, with the aim of increasing their in-house competence. Furthermore, engagement at Board level is on the rise with a greater number of chairmen and non-executive directors seeing investors on a regular basis.Looking at the possible drivers of this trend, we see several contributing factors. Firstly, companies are increasingly more disciplined about their use of social media — 45% state they have a formal social media policy, against 38% in 2013. This undoubtedly slows down the process of issuing a tweet or publishing a blog, thereby restricting somewhat the effectiveness of such communication channels. Secondly, IROs have come to realise the significant time commitment that regular social media engagement requires leading some to the conclusion this is not the most productive use of their time. Thirdly, the extent to which investors value disclosure through such channels, in addition to the announcements and direct engagement they receive on a regular basis, remains debatable.

In addition to the greater frequency of contact, companies are engaging with investors on a broader variety of topics. The scale of engagement with investors on executive remuneration has almost doubled since 2014. In addition to board effectiveness and director tenure, which the majority of IROs across Europe touch on in their conversations with investors, our findings show that more than half of European IROs are engaged with investors on board diversity. Following the exponential rise in the number of information security breaches over recent years, a new topic to emerge on the agenda is that of cyber security. Given the significant financial and reputational impact of such events, investor scrutiny of companies’ preparedness for potential breaches is expected to increase going forward.

With rapid technological innovation and regulation-driven changes to corporate access and financial reporting, investor relations has entered a new era of opportunity and challenge. Now it is down to each company to make the best of use the new tools at their disposal and address the challenges they are facing.

About the survey

Citigate Dewe Rogerson first started investigating trends in investor relations in 2009 to gain insight into how companies were adapting to the uncertain times brought about by the 2008 financial crisis. Since then, our annual IR survey has gained a growing number of supporters, not least from IR societies across Europe including the UK IR Society, Germany’s Deutscher Investor Relations Verband (‘DIRK’) and IR Club. This has led to a record number of 193 IROs from Europe’s leading companies participating in this year’s survey to provide the most comprehensive insight to date into changing attitudes and practices from objective-setting, reporting and guidance to analyst coverage, investor and activist engagement to the changing use of technology.

The full report is available on our website at:

ETFs in 2020

A comprehensive paper published by PwC last month entitled ‘ETFs in 2020’ paints a very detailed picture of how the Exchange Traded Fund business is likely to evolve globally over the next five years. According to the analysis, the market will double to $5tn by 2020, and its impact has the potential will be felt much more widely within our industry than previously imagined.

A few takeaways from the report we found particularly interesting:

  • Despite fragile economic growth in developed markets, the global AM industry is predicted to grow at a healthy pace. Having doubled over the past decade (to $70tr), PwC predicts professionally managed financial investments will grow by 6% per year , due to both asset inflows and value appreciation. The US & Europe will dominate asset flows in absolute terms, but the highest rates of growth are likely to come from developing markets. Passive funds currently account for around 35 per cent of all mutual fund assets in the US.

  • New types of indexing (also referred to as ‘smart beta’) are perhaps the most important area of innovation within theproduct class. As they continue to evolve, a growing number of investors are likely to opt for index weightings based on factors other than market capitalisation, which by itself can lead to overly concentrated exposure to certain markets, sectors, or securities. The size and scope of actively managed ETFs are also set to grow (there are currently 55 actively managed ETFs listed in the US with AUM of $9.6 billion).

  • The regulatory environment in the US and Europe is expected to have a significant impact on the evolution of ETFs. New regulations could spark further growth if they permit further product innovation or lower distribution barriers, but they could also dampen demand, particularly if new tax rules make ETFs less attractive or convenient. For instance, MiFID II could be a game changer in Europe, where the adoption of ETFs by retail investors significantly lags behind the US.

  • Firms offering ETF products to investors will need to consider rapid changes to the way asset management services are created and consumed, with the most dramatic changes enabled by technology.

If the predictions do come true, they will no doubt have an impact on a future shareholder register structure and consequently on corporate IR strategy.

A few questions for companies to consider:

  • Do I monitor my shareholder register on a fund level, for the activity of the largest three ETF fund providers: Vanguard, Blackrock (iShares), and State Street (SPDRs)?

  • Am I familiar with which are the largest and most active ETFs in my asset class? I am aware of key trends and drivers of their growth?

  • Do I know which indices is my security a constituent of?

  • Am I staying on top of developments in the active ETF space?

Saudi Arabia: Long March Forward

This is a guest blog post by Dr Nasser Saidi. It originally appeared in CPI Financial

The Saudi Capital Market Authority, under new leadership, has announced that qualified foreign institutions will have access to the Tadawul stock exchange from 15 June 2015 with the final rules to be revealed on 4 May. This comes as no surprise, given the announcement in July 2014 of plans to allow direct foreign purchases of shares in the first half of 2015.

But why does opening up the Saudi equity market matter? What could be some of the macroeconomic effects? With Saudi and other oil exporters facing an oil price tsunami, economic policy should be directed at mitigating the negative consequences. The IMF estimates that there will be a massive loss of $380 billion in exports, equivalent to a 21 per cent hit to GDP. The expectation is that opening up the market will attract foreign capital that previously did not have access to Saudi investment opportunities. The capital inflow, in theory, could lead to increased investment in promising sectors, bring in new technology, boost IPOs, galvanise mergers & acquisitions and improve corporate governance all of which would translate into greater economic diversification and job creation, the overarching economic policy concern. The underlying risk is that asset prices get bid up, a bubble forms, Saudi investors sell and real invest does not happen.


Opening of the market comes as part of a continuing policy of opening up, economic liberalisation and gradual international integration that has been pursued over the past 10 years. Saudi Arabia has been successful in upgrading infrastructure, strengthening education and skills, boosting access to finance for SMEs, and significantly improving the business environment. Substantial progress has been made on lowering the cost of doing business over the years. Saudi Arabia is today the only Middle East country and only OPEC member among the constituents of the G20. It joined the WTO in 2005 (which included clauses like allowing 60 per cent foreign ownership in banking and insurance, and 75 per cent foreign ownership of distribution within three years). Saudi built economic cities and industrial zones to move away from its over-dependence on oil. But oil still accounts for about 92 per cent of government revenues and though the share of non-oil real GDP has increased over the past two decades, non-oil sector exports remain limited. Foreign investment can support economic diversification.


The conservative Saudi capital market regulator had initiated several steps to liberalise the market over the last few years, including aligning working days with other GCC and international markets with Tadawul opening on Thursdays, and improving corporate governance standards to make the Saudi market attractive to foreign investors. Draft market access rules, shared in August 2014, included a 10 per cent cap on foreign ownership of the market’s value and that a single foreign investor could own no more than five per cent of any listed firm, while all foreign institutions combined could own no more than 20 per cent. If this limit is confirmed then the promised Saudi overture might prove to be too timid, a damp squib.

The Saudi and other GCC stock markets are massively dominated by retail investors. Retail investors currently account for more than 90 per cent of the share trading volume of the Tadawul, while foreign investors have been restricted to buying Saudi shares indirectly through swaps or exchange- traded funds. But retail investors may be prone to fickleness and bouts of irrational exuberance leading to volatility. Institutional investors such as pension funds, insurance companies, and investment funds are less likely to be prone to animal spirits, or so it is hoped. Increasing the share of institutional investors should help stabilise markets.

Opening of Saudi capital markets has been proceeding in phases, initially opening up to GCC investors, then opening to investment funds and now opening to qualified foreign investors.The opening up provides foreign investors access to the largest economy and

capital market in the Middle East. Saudi Arabia is the largest economy in the Middle East, with a nominal GDP of $752 billion in 2014. Tadawul has over 160 stocks, a market capitalisation of approximately $530billion and relatively more diversified compared to other exchanges in the region, with sector representation from petrochemicals, banking, telecom companies, retail and real estate. The chart below, shows the market capitalisation and turnover of the GCC markets, underscores the importance of the Saudi market: Tadawul alone accounts for more than 50 per cent of the market cap of the GCC countries and is the most liquid.


Saudi’s ouverture finally allows foreign investors to diversify risk and gain exposure to GCC investment opportunities through UAE, Qatar and now Saudi markets. Indeed, it is only in the past year (May 2014) that both UAE and Qatar were reclassified from Frontier to Emerging Market Status by the MSCI. MSCI considers both size and liquidity requirements and market accessibility for its country classification into Frontier or Emerging. The former are based on the minimum investability requirements while the latter are based on qualitative measurements that reflect international investors’ experience in investing in a given market, including laws, rules and regulations that provide for investor protection.

Will Saudi Arabia go through this process of a reclassification as well? According to MSCI, based purely on the existing size of the Saudi market, Saudi Arabia would have an equivalent weight of about 63 per cent in the MSCI Frontier Markets index, and about four per cent in MSCI Emerging Markets — the inclusion would attract passive foreign institutional investors or index investors that would have to rebalance their portfolios to include Saudi. The index house has already stated that a market does not necessarily need to pass through frontier status before entering the Emerging Markets universe. The earliest Saudi Arabia could officially enter either the frontier market or emerging market (more likely) would be mid-2017 considering the usual timelines for the evaluation and consultative process. Saudi Arabia, at present, has a standalone classification from S&P.



What can Saudi Arabia look forward to with the opening up of its capital markets and subsequent foreign investment? Opening the stock market is only one step in what ought to be a Saudi financial markets development strategy. Efficient financial markets require breadth (a wide variety of financial securities and instruments), depth (sufficient size to enable transactions without leading to large bid-ask spreads) and liquidity (ability to enter and exit markets without affecting price).

Saudi needs active money markets, bond and Sukuk markets, and a mortgage market for housing finance. Saudi Arabia should however use the opening up of its capital markets to encourage more listings of both Saudi and GCC companies (dual listings). The exchange is largely dominated by energy-related companies and financial firms. It is necessary to reduce the high concentration of capitalisation in a limited number of stocks: for example, the top FIVE names (including SABIC and Al Rajhi Bank) account for more than one-third of Tadawul. Developing the financial markets should also be part of a strategy of economic diversification, via attracting capital into promising sectors such as tourism and hospitality, transport, education, health, services etc. but the time is also opportune to start a programme of privatisation e.g. Saudi Airlines and greater PPP in infrastructure and logistics.


The ouverture of Tadawul should be part of the equivalent of a Chinese ‘Long March Forward’ of a continuing modernisation and reform strategy and of greater regional and international economic integration. The move should be a harbinger of further reform providing wider market access and establishment of foreign companies and persons via deep legal and regulatory reforms,public private partnerships,and privatisation and labour market reforms to create a dynamic,vibrant economy able to create jobs for generations of young Saudis, both women and men. But why stop there?

As the region’s biggest economy, Saudi can and should be the region’s engine of growth. Given Saudi’s massive wealth and being a major capital exporter, the Saudi market should be open to foreign listings (including government and corporate bonds and Sukuk) and cross-listing from the other GCC and Arab markets. An example would be allowing Egyptian companies and government to list equity, bonds and Sukuk that would help finance Egypt’s infrastructure, inclusive economic growth and development. Finance and trade are better than aid! Saudi’s Tadawul should move away from being insular and inward–looking to become a regional market helping finance economic growth and development across the Arab world and wider region.

Framework for Investor Targeting

Investment profile of my company

The starting point of any investor targeting exercise is to build a solid understanding of how your company’s story can fit into criteria that global investors look for when screening for companies: liquidity, key fundamental metrics and non-financial highlights.

Things to consider:

  • Does my company’s liquidity, or average daily trading volume (ordinary shares and depositary receipts combined) meet institutional investor requirements? Minimum threshold for large institutional investors is on average $1million+ per day. Smaller funds or those focused on the mid-/small-cap segment of the market often have more flexibility, however also tend to have fewer resources and less support (corporate access, investment research) from brokers.

  • Compared to the regional and broader EM peer group, which set of fundamentals particularly stands out in my equity story?

  • How are we positioning our collateral to address the needs of investors with particular strategies (e.g. Income/Yield, Growth, Value etc)? Do we have a good understanding of the triggers of the investment decision on those funds?

  • What are the key non-financial metrics that matter in my story? What macro- or mega-industry trends is my company’s equity story continually benefiting from?

Opportunity Analysis

Many companies take a technical, if not scientific, approach to identifying investor opportunity. A starting point is to conduct a comprehensive analysis of your own shareholder base, factoring in significant movements over the past four quarters.

Next, an institutional investor study draws up a target investor groups based on a number of criteria:

  • Investors who are already present in my shareholder register

  • Investors who are invested in my peer group but not in my company

  • Investors who have held my company’s shares previously but do not currently hold them

  • Investors who have been increasing allocations to my region and/or my sector

  • New EM funds launched globally over the last 12 months

  • New ideas of investors from brokers and other consultants

Things to consider:

  • Do I have a clear understanding which investors with active mandates hold my regional and international peer group? How often am I monitoring changes and activity in this list? Are the changes in line with what we are seeing in our shareholder base? If not, what are the drivers of the outliers?

  • Am I monitoring developments in the passive and ETF industry and do I understand which benchmarks my company is part of? What are my company’s allocations to each of those indices?

  • How often am I monitoring broader fund flows into my region and comparing this to what we are seeing in my company’s shareholder base?



Following this, companies often group investors into tiers, which then dictate the outreach strategy for the year. For illustration purposes the following example may be helpful:

All investor tiers have access to ‘passive channels’ which include IR website/web casts, annual report, IR mailings / press releases, IR events (R&D day, etc.), quarterly conference calls, event-driven/product conf. calls, phone & email contact with IR

The study can then be applied to three key geographies: Europe, North America and Asia.

Is Tehran Stock Exchange Index truly representing the overall market behaviour?

This is a common question asked multiple times by market practitioners and observers of Iran’s capital market. This is essentially due to the asymmetry readily witnessed by those who buy and sell stocks of companies listed on Tehran Stock Exchange (TSE).

Indeed, there are occasions when mixed signals are communicated by the All-Share Index if you happen to make professional investment decisions based on interpretations of the benchmark index.

For instance, you might see in one typical session of the exchange market that the gauge is in the red zone by about 300 or 400 points down but there are many sectors across different market boards that are experiencing gains rather than losses in price in spite of the general negative environment usually seen under such circumstances.

In one recent study performed by Armin Sadeghi Adl, Tehran Stock Exchange Company’s expert at Research Management Division, he underlined the fact that there is a meaningful diversion between two major indexes used to quantify the general behavior of the equity market namely, value weighted index — being constantly blamed for its shortcomings to illustrate the true performance of the market — and equal-weighted index, which was introduced just two years ago to the market activists and researchers.

As Mr. Adl explains about his research in his article, published by the well-reputed economic Daily, Donya-e-Eqtesad, he assures us that value-weighted Index or locally known as Overall Index does not genuinely illustrate the reality of the market since this measure is initially composed of weight of firms based on their market cap size, which is very misleading. This is because of the calculation measures employed to specify the influential companies on the Index.

In In fact, the number of listed companies allowed to be included in this computation does not exceed 17 from 321 ones present in TSE. Additionally, their market cap goes beyond 50% which is in stark contrast to the 10%, belonging to just 231 companies.

Thus, this is to say that TSE Index is impacted by small fraction of giant names. Consequently this is not a guiding element to those who adjust their investment decisions and strategies solely by such an indicator, according to Mr. Adl.

In the same vein, the equal-weighted index was introduced in 2014/15. From the time this measure first used till the first two months of current Persian Calendar, it showed a solid 33.5% growth.

Meanwhile the Overall Index registered 8.1% dip. In other words, unlike the down cycle perceived in the market throughout the period, there existed lucrative opportunities for those individuals to forego the false signals emitted by the Index and achieve acceptable and at times unexpected returns.

Statistically speaking, in the first quarter of the current Iranian year, while the Index went down by about 9.5% and the average return resulted by 17 big cap companies dropped by 10.2% (with a market cap of above 50%), there were 131 firms in the exchange market with positive returns.

It is noteworthy to say that small cap entities recorded 21% of stock trades in the same period which is a telling testimony to the claim that the market participants were ignorant of many other names in the market.

It is also good to know that many of the giants in the capital market of Iran are notoriously labeled as “index builder” as they they are the driving forces behind market downs or ups.

To shed more light on the matter, let’s take the largest and smallest names present in TSE as an example for the sale of clarity.

Persian Gulf Petrochemical Company which enjoys 8.4% share of total market cap and Tehran Derakhshan Company with a meager 0.003% stake of the whole market are the largest and smallest companies in Tehran Exchange Market. As it is self-revealing, we can understand the big difference a factor such as market cap can exert on Overall Index swings.

This is why someone who is interested in investing in the exchange market of Iran should not allow themselves to get misled by following Index movements in either directions. Rather, interested individuals should enter the market with open eyes and ample knowledge of the dynamics and fundamentals of the market.

Moreover, when studying the first quarter performance of the TSE, what actually surfaces is that most investors were unluckily focused on surprisingly just 16 names out of 321 ones available for investment in the market, according the research finds by Mr. Adl. It was so much so that half of the value of trades were single-handedly won by the big names across the market.


Moreover, turnover ratio for most traded shares has a lot to tell us. According to Mr. Adl, half of these firms experienced more than 100% turnover ratio. In other words, their shares had changed hands at least once in the market during the period.

As a live example, we can name Saipa Investment Company, with minus 9.8% return in the period. This company had the highest share turnover ratio among the list of 16 companies most favored by the market participants. Nevertheless, the average for this ratio was 99% among big cap firms in the equity market.

Nonetheless, the aforementioned companies’ loss ranged from minus 3.3% to minus 43.9%. The average was minus 23.5% in the period, however.

All in all, it appears that although the Tehran Stock Exchange did not pass upbeat trading sessions on the whole in the last quarter, it is evident that there are big opportunities out there. Therefore, it is the investors themselves and not just the investment environment to point the finger of blame at for the low or negative returns realized.

This is a guest post written by Navid Kahlor, Freelance Contributor at Al-Monitor. The original can be found here.