IR Strategy

BlackRock launches its first China A share ETF for international investors

As China is opening its stock market to greater foreign investment, licensed fund managers are using their own Renminbi Qualified Foreign Institutional Investor (RQFII) quota to offer new products to their clients. BlackRock has today launched an ETF focused on the hard-to-access A shares in China, that aims to track the performance of the MSCI China A International Index. This index represents a broad and diversified basket of over 300 large and mid cap stocks.

The fund is listed on the London Stock Exchange, giving BlackRock’s international institutional and retail clients direct access to China’s A share equity market. A shares are mainland China incorporated companies listed on the Shanghai and Shenzhen Stock Exchanges. China A shares represents about 45.6% of the Chinese equity market, as defined by the MSCI China All Shares Index, which contains A shares, B shares, H shares, red chips and private chips.

Further References:

Fund Fact Sheets

Fund Prospectus

How to Use Technology to Keep Up with Growing IR Demands

IR advisory firm Citigate Dewe Rogerson recently released its annual Investor Relations Survey and while there were no blockbuster surprises, the results do show a clear and important trend.

Reviewing the summary of the report reveals a basic fact about the direction of IR: the levels of disclosure and engagement that are required for today’s investor relations are strictly increasing. A third of companies are increasing their disclosure in at least one area, and companies are looking to put more emphasis on sustainability reporting. On the engagement front, 43% of companies reported they will be increasing roadshow activity, and many firms are taking on more responsibility for targeting investors as well.

While some companies will add resources to meet the increased demands, many IR teams will find that they must do more with the same resources.

As the study points out, IR departments are looking to use technology to make their workload more manageable. While many companies are becoming comfortable with social media, most are still limiting its use to disseminating information. However social media holds the promise to be the most powerful tool available for better IR.

Let’s start with targeting. Social platforms allow members a channel to share their interests and connect to those with similar interests. The Closir platform brings this to IR by allowing institutional investors define their investment profile and then connect with companies that match their strategy. The investor’s activity on Closir also helps us connect and introduce them to investment opportunities.

For a company this means better investor targeting with the deepest level of insight on investors anywhere. Finding the marginal institutional investor has never been more efficient.

Social platforms can also increase the effectiveness of disclosure as well. The direct and two-way communication of social media allows investors to tell companies what they want to see for disclosure. On Closir, companies can get instant and on going feedback from investors on their disclosure practices. They can also see how investors interact with the information they disclose in real time through their profile analytics. And of course, Closir’s patented disclosure template makes a world class disclosure program incredibly simple and easy.

Citigate’s latest survey confirms that the increased demands and workloads that many IROs often speak about is an industry trend. Social technologies and media aren’t just a way to achieve better engagement and disclosure, they are an imperative to successfully deliver better IR in an environment where demands are guaranteed to increase but resources are not.

Active encouragement for fund managers

A number of eye-catching recent statistics have reignited the ongoing debate around active vs. passive investment. Passive funds now account for 35% of all mutual fund assets in the US, up from just 2% 20 years ago. As illustrated in the Financial Times charts below, in 2014 less than 15% of US large-cap mutual funds outperformed their benchmarks, marking a low point for an industry under increasing scrutiny.

When even Warren Buffett is telling his wife to put 90% of his fortune into an S&P 500 tracker fund after he dies, it’s difficult not to pay attention.

Morningstar recently posted an interview discussing some of the key reasons behind the growth of passively managed funds during the last 12 months. The 3 main themes highlighted are:

  • Lower-cost products

  • Wider choice of index funds

  • Strong global index performance

To a certain extent, these themes go hand in hand — the better the main indices perform, the more interest passive funds generate and the more products are tailored around them. With returns under greater scrutiny than ever, the cost advantage to index investing from a fund management point of view looks increasingly attractive to investors.

Vanguard’s own blog puts the role of these costs into perspective. Given the small margins, reducing the execution cost of the actively managed fund significantly increases the likelihood that it will outperform the benchmark. In fact, for funds with a cost lower than 50 bps this number rises to 39%.

Perhaps inevitably, 2014 saw a substantial increase in the prevalence of alternative investment strategies such as smart beta. These strategies are a logical half-way house, offering investors the lower-cost security of index investment with the flexibility of an active weighting strategy. It may be too early to evaluate the long-term success of this approach, but after such a difficult year in the press, active fund managers are increasingly taking advantage of the additional opportunity to demonstrate that skill still has a huge role to play in chasing alpha, even if this does herald a more general trend towards cost reduction across the investment management industry.

Closet tracking

Many have pointed to the dubious practice of ‘closet tracking’ as a drag factor on active investment return figures. Closet trackers are actively managed funds which track the index either entirely or to a significant extent, meaning that investors lose out on both counts, as they are charged high fees for what are effectively passively managed funds. In fact, Informed Choice point out that over three quarters of the IMA UK All Companies sector funds correlate with their benchmark index to a degree of 90% or more. An FT articlerecently highlighted that as much as a third of actively managed UK funds can be classified as such. Some correlation is probably a good thing, particularly given index performance in 2014, but given the higher fees there comes a point where it makes more sense for investors to bypass the middleman and go straight for the index.

The case for active management

Active and smart beta funds still offer some obvious advantages over their passive counterparts. A Times article published on Saturday cites a study by HFM Columbus which suggests that active funds in the UK have actually prospered during the last 12 months, although the study does not take into account the execution costs of the respective strategies.

The article highlights the fact that control over investment provides protection against macro industry trends such as the falling oil price, as the performance of companies like BP and Royal Dutch Shell drag indices down and provide the active fund manager with an opportunity to outperform. The strong performance of small- and mid-cap stocks in 2014 also offered investors a good alternative for getting ahead of the market. Skilful fund managers continue to exploit this opportunity to good effect to stay ahead of their benchmarks. As the Novel Investor chart we posted up over the weekend shows, emerging market equities are the other big performers as an increasing number of active fund managers look internationally for value. Opportunities are often found within segments of the market not covered by mainstream research analysts.

The wider performance margins emerging markets and SMEs offer can reduce the impact of execution costs for high return funds (the impact of macro trends can be similarly amplified). The higher volatility of these stocks coupled with a more lenient disclosure environment and an often unpredictable economic or political climate means that it’s particularly important for investors to be actively engaged with the companies in their portfolios, and to stay on top of and react to the latest developments to maintain an edge over their passive rivals.

If they can manage this, 2015 may yet be the year of the active investor.

IR guide to MIFID2

Last month the European parliament approved MiFID II, an ambitious piece of EU law, which will have meaningful implications on how shares are traded, cleared and reported. We aim to provide some insight on developing issues, with particular reference for Investor Relations teams around the world.

Since its implementation in 2007, MiFID has been the most significant piece of regulation shaping capital markets across Europe. The goal was to reinforce the European financial market and harmonise regulations by enhancing marketing transparency and improving investor protection. MiFID has provided the framework for the rise of ‘multilateral trading facilities’ (MTFs) and other alternative trading venues, which collectively narrowed spreads and decreased fees for investors. Today anywhere between a third and half of trading of European large cap companies happens off-exchanges and on MTFs. Consultancies predict that a further 5-15% of trading happens on Dark Pools and Crossing networks (explained below).

Why is it being revised & what exactly is MiFID II?

Following the implementation of MiFID I, few could have predicted the rapid rise in algorithmic and high-frequency trading (HFT). Unintended consequences of this have included a much more divided (across venues) trading landscape and migration to so-called ‘dark pools’, which help conceal volumes and identity of traders. Regulators also worry that demand-supply dynamics are distorted: dark pools move trading increasingly away from exchanges, despite the prices remaining inextricably linked (dark pool transactions settle at mid point of bid/ask from exchanges). Other instruments, most notably derivatives (contracts which draw value from underlying assets) have been largely neglected in MiFID I.

MiFID II will target transparency for pre- and post- trade of equities, ETFs, bonds and derivatives as well as seek further investor protection through a number of measures including the alteration of market structures. All asset classes will now be subject to open and transparent trading – not just equities targeted by MiFID I. The proposed MiFID II seeks to ban brokers’ crossing networks in an attempt to force trades onto ‘lit’ exchanges. Caps will be placed on dark liquidity volumes. ESMA has estimated that 20% of European trades by value are algorithmic/high-frequency and traders will now be forced to register their proprietary formulae with regulators. Post-trade data sold by exchanges are also under review in an attempt to promote accessible transparency. Clearing houses will be allowed to process trades for multiple exchanges through the ‘open access’ regulation encouraging competition in the derivatives market.

So to summarise we can expect:

  • Dark Pool caps

  • High-Frequency Trading rules

  • Data Fee rules for exchanges

  • ‘Open access’ regulation for clearing houses

The alternative venues in a little more detail

Multilateral Trading Facility (MTF): A European regulatory term for a non-exchange financial trading venue. Typically these are electronic, and allow trading of exotic products where no exchange exists. MTFs compete with exchanges on technology, lower cost base, and trading incentives for brokers. Example of this is ‘maker/taker pricing’;  ie paying brokers to trade on platform as long as the trade adds liquidity rather than take it away liquidity and price. Examples: BATS Chi-X Europe, Turquoise

Crossing network: A non-exchange electronic matching mechanism for buy/sell orders connecting brokers and dealers without the need for a public exchange (not anonymous). Examples: Liquidnet, Pipeline

Dark Pools: Private off-exchange financial trading venues often used by institutional investors with large orders who want to hide their order size (anonymous). Examples: Goldman Sachs’s Sigma X, Credit Suisse’s Crossfinder

How can I find out where my shares are traded?

All major financial data platforms will have screens, which try give you this information. There are also a number of free sources online to your disposal. One of our favourite is Fragulator. Below is are two screen we ran for Vodafone’s Ordinary Share:

Will MiFID II impact everyone or just European companies?

MiFID is specifically designed for European implementation and thus will only directly affect European capital markets. However the regulation will impact any global issuer who has a share listing in Europe or a Depositary Receipt programme listed or quoted in London, Frankfurt or Luxembourg.

What are good resources to keep up to date with developments?

There are plenty of interesting sources online. Some of our favourites are:

Check list for Investor Relations Teams

1.     Do I have a solid understanding of where my shares are listed, quoted, and traded? Do I roughly know the average daily trading volumes in each venue?

2.     Do I have a one-page management report on the subject ready in case I am asked for it?

3.     Am I working enough with my advisors and counter-parties to try to understand who is behind those trades? Am I connected with those investors on Closir?

4.     Am I aware of the three alternative ‘venues’ where trading of my securities can take place?

5.     Am I clear as to why the original MiFID has been revised?

If the answer is still no to any of the above, that’s OK, we are here to help. Just send us a note and we will find a time to go over all of this with you.

Team Closir

BNY Mellon: Insights into North American Investors’ Views of Corporate Access

BNY Mellon recently interviewed 40 institutional investors to gauge opinions on non-deal roadshows by foreign issuers. The profiles of investors, their assets under management, styles and location varied. Findings make an interesting reading, especially in the light of current wave of regulatory spotlight surrounding Corporate Access in the UK.

Trends in North American Investor landscape:

* There are $13.3 trillion in active equity assets under management in North America (approximately 60% of the total active equity assets managed globally), compared to $6.4 trillion in 2008.

* Over 3000 active asset management firms invest internationally in North America, a 75% increase since 2005.

* Top 5 investment centres for international investors are New York, Boston, San Francisco, Los Angeles, Toronto.

Survey findings of the survey (from report’s executive summary)

* 43% of investors rate their current level of corporate access to non-North American companies as ‘Average’ or ‘Poor’, driven mostly by dissatisfaction from investors located in secondary investment centres.

* Regardless of investors’ overall satisfaction with their current direct access, over three-quarters of study respondents state that they face limitations in obtaining access to non-North American companies. This is most pronounced with investors from secondary investment cities, where 87% claim to face some limitations in gaining access to non-North American companies versus only 69% in primary centres.

– 60% of respondents assert that lack of corporate access eliminates a non-North American company from their investment universe.

– Over a quarter of investors have decreased the number of investor meetings
facilitated by the brokerage community — with the mean percentage of meetings
facilitated by brokers at 68%.

– Before initiating a position in a non-North American company, 72% of investors
require at least one meeting with senior management in order to establish confidence in the team and gain a detailed understanding of the company story and strategy.

– A majority of study respondents agree that operational heads of non-North American companies should be more visible to investors, because their technical knowledge and unique perspectives provide additional invaluable insight to the investment community.

The growing equity assets under management of investors with global mandates will continue to present opportunities for IR teams around the world. However, it will be increasingly difficult for IR teams to facilitate face to face meetings with growing amount of investors, especially in tier 2 and tier 3 investment centres. We believe effective use to technology in investor engagement can play a large part in bridging this gap in the future.

Download full report

How Developed Market Investors are investing in Emerging Markets — perspectives from the IMF

The IMF’s recent report on financial stability makes a few interesting points about the evolution and concentration patterns of equity investments into Emerging Markets (EMs). In its recent paper titled “Curbing Excess while Promoting Growth”, it studies investment flows from advanced to emerging economies and leaves us with some food for thought from an IR standpoint.

First, the study quantifies a number of investment trends going back over a decade. It notes that global EM equity portfolio allocations increased substantially from 7% in 2001 to almost 20% in 2012. Fixed-income allocations followed suit, from 4% to 10% respectively. The data are in line with other similar studies, underlining the increasingly global focus of many investment portfolios as domestic biases, broadly speaking, steadily decline.

Second, the study examines patterns relating to geographical concentrations of global EM portfolios. Out of the $2.4tr of equity assets under management in EMs in 2012, roughly 80% was invested in only 12 of the 190 emerging market economies, with China accounting for a large share of this.

Third, and perhaps most striking, is the concentration of investors amongst the advanced economies. In 2012 over half of all equity portfolio investment in major emerging market economies came from the US, the UK, Singapore and Hong Kong, with the US alone accounting for about a third.

The study goes on to suggest that given this degree of concentration, the possibility of tighter monetary policies in the US and UK could have a considerable impact on flows into the largest EMs, as well as on the synchronisation of asset price movements and volatilities.

A few thoughts for Investor Relations teams in Emerging Markets

These dynamics could be consequential for EM IR teams planning an investor outreach strategy in 2015. A few additional questions may be helpful to consider:

  • What key external factors are influencing the decisions of my top foreign shareholders? Which of those factors have the strongest influence on my share price? How can I stay ahead of this issue?

  • Have I compared my shareholder base with that of my country, region or peer group and analysed how it has changed over the last two years? Have I identified key targeting opportunities?

  • How correlated is my share price and volatility to that of other main market indices?

Equity Allocations of Advanced Economies to EM Economies by Source Advanced Economy, 2012 (Billions of U.S. Dollars)

Equity Allocations of Advanced Economies to Emerging Market Economies by Source Advanced Economy, 2012 (Billions of U.S. dollars)

Equity Allocations of Advanced Economies to Emerging Market Economies by Receiving Emerging Market Economy, 2012 (Billions of U.S. dollars)

Source: IMF, Global Financial Stability Report, October 2014

Global pension funds to increase in-house management of assets

According to research published this week by State Street, more than 80% of pension schemes globally plan to bring more asset management responsibilities in-house as part of a more proactive approach to investing. As long term investors, pension funds have historically played a somewhat conservative role in the financial system. However, in today’s fast-moving environment it seems they are taking their destiny into their own hands, in particular by insourcing asset management capabilities and overhauling their approach to risk and governance.

The research surveyed 100 pension funds and found that the trend of bringing asset management in-house is driven partly by cost, with over a quarter indicating it is becoming increasingly difficult to justify external management fees. Over half of the pension funds are expecting to embrace lower-cost strategies alongside increased adoption of technology platforms and software solutions.

“Can we insource some components of the process and outsource other components? Traditionally we’ve bought the whole car. Maybe we need to buy the engine or buy the brakes or buy the engineering capability and just build the car ourselves.” — Richard Brandweiner, Chief Investment Officer, First State Super

The survey also points to a number of other trends that will shape the pension fund industry over the next five years.

Driven by lacklustre returns in a low-interest environment, pension funds are re-evaluating risk, with over 77% predicting risk appetites will increase. Pension funds are also expecting to make major shifts in asset allocations, steadily moving away from equities and bonds to less familiar asset classes such as alternatives in order to drive growth and meet long-term liabilities. Private equity is emerging as an attractive area for investment, with direct loans, real estate and infrastructure all expected to benefit.

Pension funds are also showing greater interest in investing in hedge funds. Globally 29% of pension funds that already invest in hedge funds plan to increase their allocations, while 25% plan to invest for the first time. It also comes as no surprise that over half of the respondents are planning to make better use of low-cost investment strategies. Many are adopting what are known as “barbell strategies” which involve blending a passive investment strategy with a higher-growth/risk strategy such as alternatives.

Finally, the survey points to some interesting conclusions around pension funds’ approach to risk and governance. One particular area of interest is the complex relationship between the pension fund and its asset manager, with 58% of respondents saying it is a challenge to get an accurate picture of their risk-adjusted performance. More than half also say it is increasingly difficult to ensure the interests of asset managers they are working with are aligned with their own.

Are there any implications for Investor Relations teams?

Yes, there could be, as global pension funds will increasingly look to invest and engage with companies directly. To prepare in advance it may be beneficial for IR teams to have a solid understanding of the largest pension funds, especially in North America and Europe where the above trends have been most prevalent. According to OECD, assets under management of pension funds reached $21.8 trillion in 2013 — this was concentrated mainly in the US, UK, Australia and Japan. There are a large amount of online databases and resources which can help you in your research, and we are more than happy to point you to the right direction.

Flash Update: UK Corporate Access Shake-up

Corporate Access, a service usually offered by investment banks / brokers that brings investors and corporate management teams together, is going through a radical shake-up in the UK. These developments could potentially impact not just UK-based companies but any listed company with an investor base in the UK.


After a period of lengthy consultation, last Thursday the UK’s financial regulator, the FCA, has issued its final say on the use of dealing commissions, previously used by investors to pay for research, corporate access and trade execution. As of the 2nd of June, UK investment managers should only use client dealing commission to pay for ‘substantive research’ and costs related to executing trades. Using dealing commission to pay for access to senior management at companies they invest in will now be explicitly banned.

The FCA estimates that up to £500 million pounds of dealing commissions were spent in 2012 to arrange such meetings. The new rules emphasize that costs for research can only be passed on to clients if they lead to a “meaningful conclusion”. Naturally, nothing is stopping investors from paying brokers for corporate access themselves from their own management fees (rather than passing it on to their clients), or organizing their meetings themselves without a broker.


These current developments have been widely expected by the market and its participants. It is too early to assess the precise impact on the industry however we can anticipate a few emerging trends.

  • Institutional Investors will place a greater scrutiny on how they organize their roadshows and most importantly, the business model behind it. We would not be surprised to see investors setting up their own Corporate Access departments to facilitate dialogue between companies they are interested in.

  • Brokers will most likely continue to offer corporate access service to investors, however the nature of the services is likely to change. Focus will be on access to new, unique, and valuable investment ideas priced at a point which investment managers are prepared to pay for themselves. As a consequence of this, and looking on the other side of the coin, brokers will likely be more selective of which companies they offer this service to.

  • From a company’s IR perspective, the magnitude of the impact will certainly depend on both macro and company specific factors, as well as the size of company’s investor base in the UK. Broadly speaking, we expect companies assuming more responsibility for investor targeting and engagement, and over the longer term expanding the resources of their IR teams, to accommodate new requirements.

  • We expect the regulation to present opportunities for independent providers of corporate access. The challenge those companies will face is access to investors, comparatively weak relationships, and perhaps access to resources to provide ‘seamless logistics’ which play an important role in any meeting.

Further reading: New FCA rules on use of dealing commissions

12 Steps to Best Practice ESG Reporting

We spotted this in F&C’s Corporate Governance Guidelines document published earlier in the year, and took the liberty to share. Particularly interesting for IR teams responsible for communicating ESG matters to investors.


  • Identify significant ESG risks and opportunities for the business

  • Establish and explain board accountability for ESG issues

  • Set out policies for significant ESG issues and explain how they are implemented and monitored

  • Establish and disclose targets and Key Performance Indicators for significant ESG issues covering global operations

  • Describe systems for training board members and staff on ESG issues

  • Report on performance against policies

Best Practice:

  • Explain how ESG policies link to key operational and financial drivers

  • Describe procedures for consulting key stakeholders and provide feedback on the range of views

  • Discuss challenges and set-backs as well as success stories

  • Describe procedures for verifying data including external verification

  • Take account of widely-accepted reporting standards such as the Global Reporting Initiative

  • Describe how ESG objectives are embedded into the corporate culture, including how they are reflected in remuneration policies and other performance management tools

Source: F&C, Global Corporate Governance Guidelines, January 2014

Entrepreneurs, technology and IR

Q&A with UK IR Society — Appeared in Informed Magazine, October 2013

What is the role of the technology sector in today’s economy and what relevance does IR have? While many think of technology as a niche industry in itself, I would argue that innovation stemming from the tech world is increasingly the foundation for competitiveness for most industries today. Therefore, we have a lot to gain by making our own companies more competitive in global markets by supporting young entrepreneurs and their ideas very early in the product cycle. I would also argue that the increasingly strategic role that IR plays within our world of public companies is already paramount in the world of start- ups… perhaps without it being immediately apparent. Many of the elements that make up a sound IR strategy for public companies, such as formulating an appealing investment proposition, creating an honest and consistent two-way channel of communication, and managing expectations, require skills that we in the IR profession have been perfecting for the last 15 years or so. This is also where I believe we have a lot to offer our more junior counterparts who deal not with institutional investors or sell-side analysts, but with angel, venture capital or private equity investors — all of whom demand the very same level of excellence in IR. In addition to that, there is a great deal to be learnt by us too. When was the last time an IRO had to do a 30 second ‘elevator pitch’ for a prospective investor?

What do you think needs to be done?

A good first step would be for IR societies around the world to begin working with start-up communities and their young entrepreneurs, primarily to raise awareness of the importance of IR best practice as well as the benefits it can bring in the long term. In November, the Middle East IR Society will be hosting the first Middle East Start-Up Forum. This will provide an opportunity for IROs from listed companies to meet representatives from early stage ventures from across the entire Middle East. I am sure it will make a great setting for interesting discussions.

Given that Silicon Valley remains the hub for innovation in the tech space, where do you see London fitting in? Having lived and travelled extensively in the Middle East, Asia, Europe and the US, I believe that London possesses many of the characteristics required for success as a start-up hub: with some of the top universities, it has been successful in attracting talent from across Europe and beyond; and from an infrastructure perspective, it is well connected to other major cities across the world and operates in a convenient time zone. It also has a clear competitive advantage in certain sectors, notably in banking and finance, which I believe can go a long way to benefit the young and growing community of FinTech entrepreneurs. To put it into context, within the five miles that span the west edges of the City and Canary Wharf, we have the largest concentration of banks, investors, and brokers anywhere in the world. This has to be positive for small companies with innovative ideas to bring to the marketplace, especially during the time of profound change for the industry. The development of entrepreneurial communities around relatively new initiatives such as Level39, Seedcamp or TechHub can only accelerate London’s ambitions to become a global technology hub. This also supports the UK and EU economies and helps existing companies become more competitive globally.

What’s being done for technology and innovation? Like many of our peers, we recognise that technology and innovation are key drivers for our success and are excited to be involved in various initiatives, both internally and externally, throughout the year. For example, earlier in the summer, along with CityMeetsTech (a London-based organisation promoting investment in high quality UK start-ups), we held an event for eight promising UK companies together with angel and venture capital investors.

The outcome? Some of the new companies met the right investors to provide funding, support, guidance, and connections that will help them get off the ground while pioneering and promoting the concept of better investor relations for start-ups and their stakeholders. Internally at BNY Mellon we have a number of initiatives aimed at promoting innovation in our businesses, including our very own internal incubator programme open to all employees. ■