IR Strategy

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.

Background

  • 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
clz.investorservices@gmail.com
+971 526 75 99 87

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.

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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.

MiFID 2

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.

Coverage:

  • 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.


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, ETF.com


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: http://www.citigatedewerogerson.com/wp-content/uploads/2015/07/Citigate-Dewe-Rogerson-Investor-Relations-Survey-2015.pdf

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?


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?


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Segmentation

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.

Evolving face of institutional equity business

A interesting Bloomberg article titled “Wall Street Cracks Down on Free Sharing of Analysts’ Notes” has crossed our desk last week ignited a discussion within our team about the the market for investment research.
The article points out how brokers, to some extent driven by regulatory pressures, are overhauling the process of producing and distributing of research and using online portals to track what gets read and by who- and bringing closer to be able to finally see how much investors are willing to pay for analyst report.

As a refresher, most of equity commissions paid by investors to brokers are split into two components: Execution and Non-Execution. Execution component pays for physical cost of trading and cleaning the transaction, and non-execution pays for other services such as investment research and corporate access. In a bundled commission environment, those two components are not separated and captured by the broker executing the equity trade.

CSAs (introduced in 2007) enabled fund managers to separating commissions into payment for executing trades from payment for research, however most argue they were not not sufficient to determine the value of services consumed, nor control spending. Furthermore the commissions (whether bundled or unbundled) actually belong to the asset manager’s end client however the asset manager has the full discretion of how to spend it.
The direction of regulatory travel is towards complete unbundling, something that we believe , will reshape the economics of institutional equity business, carrying with it serious implications to asset managers, sell side firms and IR teams.

We see those five questions are at the crux of the debate:

1- What has been happening to global trading commissions, which still drive the vast majority of supply of research and corporate access services?
Post crisis environment brought about the worst bear market for equities since the 1930s. Combination of depressed equity valuation, lower trading volumes, lowers fees generated from IPOs and primary market activity, a steady shift from active to passive investing meant a significant decline in available commissions for equity businesses providing research and corporate access. The effect was particularly severe outside North America where commissions are calculated as a percentage of the value of the share price. Emerging markets as a whole have also suffered their own set of dynamics which have further reduced comission dollars and meant instances of banks shutting down entire operations (ex. DB in Russia, CLSA in , Nomura in)
So what did this mean for broker revenues? Frost Consulting estimates that there has been a 43% reduction in global commissions for equity research, leading to a 40% reduction in budgets allocated by the 600 or so reduction in budgets allocated by the c 600 firms producing equity research from US$8.2bn at the peak in 2008 to US$4.8bn in 2013.

2- What would regulators like to see commission payments used for?
In short, just for execution. The UK’s Financial Conduct Authority wants brokers’ research to be treated as a cost to the manager and paid out of their own P&L rather than paid for out of client funds- a reform known as “unbundling”. This may eventually lead to a “priced” market for investment bank research which could transform the market in which consumers (investors) only receive the products they want and purchase in which personalisation, interactivity, niche focus will be critical for commercial success. The changes could provide an advantage for independent and specialist firms. In 2014, the FCA already banned using client commission payments for Corporate ACcess in the UK in 2014, a rule that is still looks that is yet to be adopted flouted

3- Are investors treating commission spending as if they were their your own?
Milton Friedman, the US economist, once said that perhaps the most wasteful form of spending is spending someone else’s money on somebody else: you are then “not concerned about how much it is, and not concerned about what you get get”. Perhaps there is a little bit of thoughts that can be applied to current discourse in the asset management industry. Regulators feel that allocation of spending (and hence the pricing) of broker services would have been different if investors had to pay for it from their own pockets. Surely, they argue, more considration would go into what is valueable, hence

In last year’s survey by the CFA Society UK, almost half of respondents think that Investment firms in the UK do not manage dealing commission — which is a client asset — as carefully as if it were their own money.

payments as if it were your own?

5- What do investors value most from brokers and how is that value priced?
Investors consume a number of services from brokers, and

Experts say that one of the trickiest aspects of pricing research is working out its value.

Reverse roadshow / investment trip to
Face to face management meeting at home
An Investor Conference
Call with reserach analyst
A report

Related articles
Bloomberg: Ballad of a Wall Street Research Analyst, Told by Brad Hintz

Developments in Sovereign Wealth

Invesco Asset Management recently surveyed 59 sovereign wealth funds (SWFs) worldwide and published a report outlining some of the key themes. A few points which we found particularly interesting:

  • Studying the investment preferences of SWFs, there is continued growth in emerging market allocations for new assets, however developed markets remain a preferred choice. Two headline corrections visible are: relationship between emerging market investment and infrastructure and relationship between developed markets and real estate. As discussed earlier, a number of funds are also beginning to target frontier markets.

  • SWFs cite a number of factors which restrict their investment in emerging markets, such as political instability, corruption, regulation change and a lack of legal protection. These risks are of particular concern to SWFs because they cannot be quantified and many emerging market investments are prohibited by risk management guidelines irrespective of potential returns.

  • The biggest challenge for SWFs is sourcing new deals. Respondents explained that sourcing deals is toughest in infrastructure and is driving greater collaboration between SWFs, especially those across emerging markets. Good example of this is last week’s announcement of Saudi SWFs $10bn into Russia via its RDIF fund.

  • As we have noted earlier with some of largest pension funds, SWFs are relying more on in-house expertise to manage their funds in an effort to bring down costs and improve performance in the low-yield environment. The report points out that the percentage of global equities managed in-house rose to 34 percent from 26 percent at the end of 2013 (see chart below). Historically the vast majority of the fund’s equity investments were outsourced to external fund managers. It is a trend worth watching, and it continues it will mean that SWFs will continue to grow in relevance to Investor Relations Teams teams. Many of the largest funds are already frequently engaging management teams.

SWFs assets in perspective

Total Mutual Fund AUM: $74.3 tr

Global Pension Fund AUM: $37.3 tr

Sovereign Wealth AUM: $7.3 tr

Exchange Traded Funds AUM: $ 3.0 tr

Hedge Fund AUM: $2.8 tr

Additional reading

Reuters summary of key findings of survey

Closir Blog: Global pension funds to increase in-house management of assets

Closir Blog: Update for Norges Bank Investment Management Strategy

Source: Invesco Global Sovereign Asset Management Study 2015

Research Regulations: the Quest for Clarity

More than 200 investment professionals gathered last month at the Institute of Directors (IoD) in London for a series of panel discussions on investment research, and how it should be provided and paid for. With corporate access now formally ‘unbundled’ from trading execution services in the UK (meaning fund managers must pay brokers to organise meetings with company management separately and out of their own pockets), the focus has shifted to research, which the FCA decided not to touch the first time around.

CSAs (commission sharing agreements) already exist to keep fees for execution separate from fees for other services such as research and corporate access, although the precise value of each remains somewhat unclear. Now faced with the prospect of potentially having to pay for all research themselves, rather than passing the cost on to their end clients, fund managers (and regulators) are taking more of an interest than ever in its cost and value.

At the IoD there appeared to be broad (although not unanimous) consensus that ‘something needs to be done’ to resolve the cost/value question, although there was some difference of opinion on exactly what and how.

What is wrong with the current research model?

Regulatory scrutiny is centring on:

  • the use of research as an ‘inducement’ (so investors will execute trades with the broker publishing the report)

  • the fact that the current model discourages competition

  • the lack of transparency around both cost and benefit

The FCA’s main goal is to ensure a fairer, more competitive, more efficient market. The key to this is transparency. CSAs were introduced to bring greater clarity to the whole commission payment structure, although the feeling is that they actually tend to muddy the waters, encouraging brokers to juggle commission between services to ‘reverse engineer’ fees.

Thus one of the regulators’ top priorities is to cut the strings that are attached to ‘free’ research and encourage greater competition for individual sell-side services.

How much should investors pay for research?

On the face of it, imposing arbitrary prices on research reports would seem to make little sense and in any case is almost certainly beyond the remit of regulators. The popular view seems to be to let the market decide.

Most investors agree that the aim of regulation in this case should be deregulation: once you remove all barriers to transparency and competition, the free market will determine the price through simple supply and demand economics.

In most cases it is still the end users who are paying for research and other services (through trading commissions), although making fund managers cover these expenses out of their own pockets should help to close the gap between price and value and stem the tide of ubiquitous ‘free’ research.

How is research currently consumed?

The vast majority of institutional investors undertake a quarterly voting process to evaluate and rank the quality of the sell-side research offered by the various providers. Once rankings are determined, budget is allocated accordingly (different services carry different weights).

Investors also rely to a varying extent on their own research and more often than not, on the sea of reports which are available either from one of the major data providers or through analyst connections. Many supplement ‘bundled’ sell-side research with reports from trusted, independent providers. When the budget is spent, they go ‘execution-only’.

The potential rule changes are forcing investors to think long and hard about what they actually need and whether the research they currently consume is worth what they might have to pay for it. As a result, fund managers are being encouraged by their firms to use whatever tools are at their disposal to more closely monitor consumption and assess value.

In recent years there has also been a growing tendency for buy-side firms to bolster their own in-house research capabilities, thereby reducing their reliance on potentially expensive sell-side services. This of course requires time, money and expertise, but the potential benefit for individual firms in cultivating their own proprietary investment ‘edge’ is obvious.

How would rule changes affect the market?

Opinion seems to be divided on how potential changes would affect the market. Below are some of the main advantages and disadvantages to unbundling research raised at the conference:

Potential advantages

  • Execution services would move more freely

  • Research would become more specialised

  • Independent research firms would benefit from a level playing field (one attendee suggested consumption may triple from its current level of 8% per firm)

  • Similarly, sell-side firms who produce research reports in markets where they do not execute trades (e.g. Standard Chartered in Russia) would not be unfairly excluded

  • A growing culture of in-house buy-side research would help to differentiate firms

Potential disadvantages

  • There may be a reduction in the depth and breadth of sell-side research

  • Small- and mid-size firms may be excluded from sell-side research distribution

  • Boutique sell-side firms may lose out

These discussions are likely to continue until the respective regulatory bodies can provide some clear guidelines on rule changes and timescales. Many at the IoD expressed growing frustration that, having taken the lead on this issue, the FCA seems now to have backed away; the recently announced delay of MiFID II has also left a number of important questions unanswered.

Some are putting their faith in the market to resolve these questions, the idea being that if a large minority of asset managers lead the way then the rest of the market will follow. There are already signs that this process is underway, with a number of firms reaching into their own pockets to cover not only corporate access, but also research. One of the more interesting quotes of the day came from a fund manager who said “If there is a distribution platform that works, research will unbundle itself”. Healthy markets have always been founded on efficiency.

The need for change is apparent, and now finally it seems the appetite is too. Hopefully 2016 will bring a new sense of purpose and clarity to an issue which continues to create uncertainty for investors, brokers and companies alike.

What does this mean for company IR teams?

Should the regulators decide to fully unbundle research, there would likely be a decrease in the amount of sell-side reports written and distributed, particularly on non-blue chip companies, as analysts begin to take a more focused, tailored approach. Investors would be forced to rely more on their own in-house capabilities and on information directly from the company. In both cases the role of investor relations takes on extra importance as fund managers are less willing to invest their own money in the expertise of brokers.

The likely growth in buy-side consumption of independent research would present an increasingly attractive option to companies looking to reach a wider audience of investors. There would be an opportunity for technology start-ups to follow in the footsteps of companies like Stockviews and SeekingAlpha to fill the gap left by free, ubiquitous, one-size-fits-all sell-side research.

As discussed above, regulatory changes are still some way off, so the best thing IR teams can do at this stage is to stay on top of developments and maintain best practice IR, strengthening connections with both sell-side and buy-side.

Are investors ready for a Digital Reporting Future?

This is a guest blog post Thomas Toomse-Smith from the Financial Reporting Council. The Financial Reporting Council is the UK’s independent regulator responsible for promoting high quality corporate governance and reporting to foster investment.

The internet and technology has revolutionised many aspects of communications; however, communications between companies and investors does not appear to have taken full advantage of this revolution.

In order to understand why this might be, and how reporting might evolve in the future the UK Financial Reporting Council’s Financial Reporting Lab (Lab) launched a project to look at digital reporting by companies. The Lab has issued its first report from this project. The report called Digital Present is based on analysis conducted by the Lab from in depth interviews with companies and investors. The interviews were supplemented with the results of an online survey of retail investors.

The report provides practical guidance to companies and highlights some areas where improvements could be made to what currently exists.

The importance of annual accounts

Annual reports remain of paramount importance to investors. However, investors prefer PDF for digital annual reports. They consider PDF not as a substitute for a hard copy, but as a progression from it. PDF provides the best mix of attributes of paper and digital annual report, but companies still could improve the PDF by thinking more about how to deliver the best experience with it on-screen.

Making sense of multi-channel

Alongside the annual report, companies use a range of other channels to communicate information Investors need to consume information on multiple companies in an efficient manner. However, company-produced tools, by their very nature, focus only on the individual company, and the multitude of channels leads to a significant proportion of them too failing to gain traction with investors.

Investors have specific feedback for companies on the most significant channels and tools:

  • Delivery of annual results presentations — Investors want multiple channels to be available (e.g. phone and webcast) preferably with supporting slides. Transcripts of the entire event, including all Q&As, is also deemed important.

  • Social media — Investors do not currently view social media as a useful channel for company produced, investor-focused information. It is seen as repetitive of other channels.

  • Investor relations videos — Many Investors are cynical about the use of video by companies. They consider them to be promotional in nature, and unfocused in aiming at many audiences. Those Investors that value them concentrate on nonverbal information such as body language.

  • Investor relations apps — Apps are not popular with investors. Many Investors find the need to have an IR app for each company prohibitive; they are concerned that this uses up space and adds clutter to their devices, especially when following multiple companies.

Investors who participated in this project suggest that companies:

  • Reduce duplication and focus development towards tools and channels which provide new or additional information.

  • Acknowledge that investors follow more than one company by making tools and channels more consistent in scope and operation with other companies, making them easy to access and locate.

  • Make the purpose of each channel or tool clear to investors, and clarify its contents.

Investors have shown they are open to innovation when it meets their needs to access information relevant to their analysis, across companies and time. To enhance current digital reporting methods and innovate further, it will be important for companies to build on the attributes of current reporting that investors identify as being most helpful.

The Lab will build on the findings from this stage of the project to inform remaining phases. In the second phase, ‘Digital Future’ the Lab will work with companies and investors to develop ideas of how companies could use digital reporting in future to improve their communication with the capital markets. Do you have views on this area? The Lab would be interested in hearing from ClosIR users. The Lab has released a survey alongside the Digital Present report seeking views from those involved in the production and use of corporate reporting. The survey will be open until the end of June and can be accessed here.

You can read the full Lab report here.

Investment Research: To Free or Not to Free?

Last week we published a blog in which we attempted to get to grips with some of the important questions that remain around the unbundling of commission for corporate access and trade execution. A Bloomberg articlethat came out around the same time entitled “Wall Street cracks down on free sharing of analyst notes” leads us nicely to the remaining piece of the unbundling puzzle, namely investment research.

The main objectives of the ongoing regulatory scrutiny of both research and corporate access are to eliminate conflicts of interest, increase market transparency and level the playing field. To this end, the revised rules on corporate access are fairly simple: if fund managers want their broker to put them in front of companies, they must pay for it out of their own, and not their clients’ pockets.

Research looks to be heading down a similar path. If, as expected, regulators demand that investors who wish to continue benefiting from broker research must pay an upfront, out-of-pocket yearly fee (which is not linked to trading volume or value), there are 4 possible outcomes:

  1. Brokers will continue to fund research as a loss leader

  2. Fund managers will fund research

  3. Companies will fund research

  4. Investors increasingly conduct and rely on their own research (in 2014 in-house buy-side research increased by 42%)

In reality, all of these things may happen to some extent. In 2000 the US SEC passed Regulation Fair Disclosure (Reg FD) requiring publicly traded companies to disclose material information to all investors at the same time, meaning in theory analysts are free to conduct and disseminate research to whomever they please. In the case of large companies, banks will almost certainly continue to pay as they chase business from companies as well as from investors. But this does raise certain issues.

As the Bloomberg article outlines, the main problem with expecting fund managers to pay for research themselves (besides the fact that they have been passing all costs on to their own clients for years) is that research reports are widely available online or from colleagues or contacts in the industry, free of charge. The sell-side switch away from “blasting out everything it produces” will take time, although it seems that technology will play an important role in restricting access and tracking readership.

One of ESMA’s criticisms of the current model is that buy-side firms are using their clients’ money to pay for research as part of an existing commission arrangement (meaning they basically get the service for free), effectively shutting independent providers out of the market. The regulatory amendments and the likely collapse of the current model should open the door wider for independent research providers, including some of those we highlighted in our previous blog with innovative models such as Stockviewsand SeekingAlpha.

The other likely consequence of limited distribution of research reports will be for analysts to adopt a more tailored, targeted approach. This could be crucial for an industry which is often slow to adopt new practices and technology. It is often the cheaper, more agile, independent providers who are quickest and best placed to respond to technology-oriented opportunities in the market, although as the article highlights, it seems that the big banks are already starting to cotton on to the competitive benefits of this approach.

What impact will this have on company IR teams?

A more specialised, less generic focus will surely bode well for companies across the board but perhaps especially for SMEs and those in emerging markets, who have historically tended to be lost in the sea of free blue chip research reports. Former NIRI national board chair Brad Allen, writing for IR Magazine, advises company IROs of all shapes and sizes to strive to be “the go-to source not just on your company but also on your industry”, rather than relying on analysts and databases to tell the story.

The reality is that while the unbundling of corporate access and research services remains a hot topic in Europe and beyond, it will be a while before legislation is formalised now that MiFID II itself has been delayed. Even in the UK there is a definite air of ‘business as usual’ as brokers, analysts and fund managers wait to see who flinches first.

In the meantime, IROs would surely do well to heed Allen’s advice. In emerging markets especially, a proactive and innovative, technology-friendly approach will help them to address the far more immediate concern of an increasingly jittery investment community. Good IR alone will probably not be enough to stem the current flow of capital out of EMs, but companies who tackle this issue head on now will be well placed to capitalise when the tide finally turns.

Activist Investor’s influence on Passive Funds

The cover story from this week’s Economist caught our attention, particularly as it relates to a number of IR themes we have been observing closely. Academic literature* examining the recent track record of US activist investors concludes that despite their reputation and short term focus they are more often than not a force for good, at least in terms of driving greater operating performance and shareholder returns.

The article draws attention to a polarity in today’s average shareholder structure, one that is particularly evident in the US. On one side of the spectrum is ‘lazy money’ which comprises a growing number of computer-run index tracking funds, ETFs and mutual or pension funds, which generally prefer not to get too involved in radically altering the strategic direction of the companies they invest in. On the other are large funds which buy entire companies, often taking them private and actively dictating strategy.

Activist investors can fill a key corporate governance void by influencing passive funds and ‘lazy money’ to take an interest and support either the activist investor or management’s chosen course of action. The long-only funds holding the majority of the free float generally assume the role of ‘blocker’ or ‘enabler’ for activist campaigns so the more involved they are the better. This involvement looks set to increase as activist funds grow in popularity. In 2014, a fifth of flows into hedge funds went to activist investors, resulting in their AUM rising from $55bn to $120bn over a 5-year period.

The two largest providers of passive products, Blackrock and Vanguard, have already pledged to work more towards ‘long term interests’; this will inevitably include increased contact with company boards. Company management and IR teams may also make a more proactive effort to establish relationships with passive managers, something which was not really considered as recently as a few years ago.

The final angle of the debate centres around the potential for transferring the US-style activism model across the Atlantic, particularly given the arguably limited opportunities in the US (only 76 companies in the S&P 500 registered a poor 5-year Return on Equity and only 29 trade below their liquidation value). European investors will argue that they already have more say than their American counterparts on corporate governance issues such as renumeration and board appointments, and differences in culture as we move east mean that many activist fund demands are often settled discretely and diplomatically.

Long Term Effects of Hedge Fund Activism, Lucian A. BebchukWSJ

Unbundling: 4 Questions to Consider

As UK’s FCA and European regulators continue to clarify their stance on commission ‘unbundling’ we thought it might be useful to quickly revisit the debate and attempt to answer a few questions at the core of the debate.

To recap (also see our earlier piece: Brief history of the dealing commission), most equity commissions paid by investors to brokers are split into two components: execution and non-execution. The execution component pays for the physical cost of trading and clearing a transaction; the non-execution component pays for other services such as investment research and corporate access.

Commission sharing arrangements (CSAs) enable fund managers to keep the two components separate, however until recently they have tended to be ‘bundled’ together into one commission payment. CSAs have been criticised for their lack of transparency in helping fund managers to determine the value of the services consumed and to control spending. Furthermore, even though the fund manager has full discretion in how the commission is spent, it is paid for by the fund manager’s end clients.

In Europe at least, we seem to be heading towards complete unbundling, which will likely have profound implications for asset managers, sell side firms, IR teams and entrepreneurs alike

1. How have global trading conditions affected made the supply of research and corporate access services?

The post-credit environment has ushered in the most difficult period for equities since the 1930s. This is due to a huge combination of factors: depressed equity valuation, lower trading volumes, lower fees generated from IPOs and primary market activity, equity market fragmentation and HFT, and a steady shift from active to passive investing. All of this has contributed to a significant decline in available commissions for equity businesses providing research and corporate access. Emerging markets have fallen prey to additional dynamics, which have further reduced commission dollars from trading and caused banks to scale back their securities operations and in some cases shut down entirely.

So what does all of this mean for broker revenues? Frost Consulting estimates there has been a 43% reduction in global commissions for equity research, which in turn has led to a 40% reduction in budgets allocated by the 600 or so firms producing equity research, from $8.2bn at their peak in 2008 to $4.8bn in 2013.

2. What would regulators like to see commission payments used for?

The UK Financial Conduct Authority (FCA) wants broker research to be treated as a cost to fund managers to be paid out of their own P&L rather than out of clients’ funds (‘unbundling’). This may eventually lead to a ‘priced’ market for investment research in which consumers (investors) only receive the products they are willing to pay for. It seems reasonable to assume that this will lead to greater personalisation, interactivity and niche focus. Such changes could offer independent and specialist firms an edge, as well as present opportunities to the long tail of companies often overlooked by sell-side analysts. In 2014 the FCA banned the use of client commission payments for corporate access in the UK, a rule which made waves in the investment community but has yet to be fully adopted or implemented.

3. Are investors paying commission responsibly?

Milton Friedman, the US economist, said that perhaps the most reckless form of spending is that which involves someone else’s money as you are “not concerned about how much it is, and not concerned about what you get”. Perhaps this thinking can be applied to commissions. Regulators feel that the amount of money allocated to (and by extension the pricing of) broker services would be somewhat different if investors had to pay for it out of their own pockets, and that more thought would go into the true value of these services. In last year’s survey by the UK CFA society, almost half of respondents agreed that investment firms in the UK do not spend their clients’ commissions as carefully as if they were their own money.

4. How do investors assess and quantify value?

Despite the ubiquity of research and corporate access services, there is no uniform pricing model and industry experts agree that it’s a tricky subject. As Matt Levine points out in his column, one of the main challenges is that equity research, at least from a regulatory point of view, is classified as material, non-public information. As such, institutions have a responsibility to distribute it ‘fairly’. Something will have to give.

Many would argue that while these services provide a broad benefit and ultimately make markets more efficient (by helping to disseminate information and underlying analysis more widely), the model only benefits a narrow segment of the market. Asset managers are investing more and more in their own in-house research teams, and in some cases in dedicated corporate access desks. Numerous independent research providers and start-ups have also entered the market to fill the gaps and propose new models. Many of them, like us, believe that technology can play a complementary role and perhaps solve one or two issues along the way.

Investor's Desktop

Over the summer we spoke to over 50 institutional investors to find out a little more about what tools they currently use on a daily basis in their investment decision process. A portfolio managers desktop would likely include a combination of the following platforms:

  • Financial data providers (for real-time prices, company fundamentals — both current and historic, public filings data, research reports, technical charts)

  • Sell-side analyst support (research reports, recommendations)

  • Screening tools (some through data providers, some internal)

  • Financial news terminals (international and local)

  • News and social media aggregation tools (including RNS)

  • Sell-side analyst consensus consolidators

  • Expert networks (communities of industry professionals on the ground)

  • Macro research tools

  • Portfolio risk analytics and valuation tools

Where does investor relations fit in?

Although the tools listed above provide investors with key fundamentals and perspectives on the company, there are a number of other areas where information that is critical to the investment decision is often more difficult to find. We have put together a checklist that summarises the areas that investors have told us are most important, and where investor relations can make an impact. To request this check list contact any of our team (info@closir.com) and they will be happy to share it with you.

Helping investors to fill in the gaps and reduce the noise is central to what Closir does. Based on the feedback above, we’ve built a simple, standardised template for companies that investors can access easily view, compare and integrate into existing research processes. View your current profile by logging in to Closir.