Publications

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

Review of BCG’s Asset Management Survey

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

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

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

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

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

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

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

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

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

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

BNY Mellon: 2016 Global Trends in IR

BNY Mellon Depositary Receipts group has very recently published their annual report on global trends in investor relations. With 550 companies surveyed from 54 countries, it is probably the most comprehensive barometer of the current themes in our industry. The report provides large amount of comparative information on how listed companies are adapting to the changing marketing condition, touching on topics such as budgets, allocation of management’s time for buy side meetings, reporting lines, use of sell-side, measuring team effectiveness as well as insights into evolving areas such outreach to ESG investors and the use of technology.

Firstly as a qualifier, lets consider the demand side dynamics for global issuers. Despite the inevitable short and medium term swings in investor appetite for a given asset class, market or industry evidence that investors all around the world are diversifying and are increasingly adding a global component to their portfolios. Our own analysis point to over 4,000 institutional investors who hold emerging market securities, versus only 400 in early 20oo’s. BNY Mellon’s own estimates point to number of investors that hold DRs (or, roughly translated as those with global mandates) has increased from from 3,261 in 2Q10 to 4,533 in 2Q15. This figure will, we believe, continue to grow, and present opportunities in areas where a- investors previously held most domestic bias and b- have considerable assets under management in active management and c- see diversification opportunities globally.

With this backdrop, a couple of things to note from the survey:

  • IR teams are working harder to address the growing global investment opportunity. This is evidenced by 1- investor meetings taken by C-suite executives and IROs inside and outside their home markets have increased by 12.6% compared to 2013 (from 250.6 meetings in 2013 to 282.3 meetings in 2015). 2- companies almost doubling their IR budget allocation to travel, from 12.8% in 2013 to 24.3% in 2015, which in turn is interesting to contrast with the slight decrease in companies holding analyst/investor days (63% to 59%).

  • Top 10 sources of new investor demand in five years time, according to surveyed companies, will split evenly between emerging and frontier market. US, UK, China, Germany and Singapore lead the pact.

  • Technology tools, such as conference call/webinar and video conference calls has been increasingly used in toolkit of a global IR officer (72% in 2015 vs. 63% in 2013 and 41% in 2015 vs. 34% in 2013). With the management and IR team time relatively fixed, and the buyside universe expanding — there is no element of a doubt that tools that help reach new investors can increase reach and efficiency, at a fraction of a price. We are strong advocates of using new tools to tell a company story . Can any one see how virtual reality or 360 videos can be applicable to the world of investor relations?

  • Despite the wave of regulations on how investors will pay for research and cooperate access, brokers continue to dominate the company non-deal roadshows arena, however with some signs of this changing. 10% of companies have organised NDRs themselves, up from 5% the previous year. Interestingly, companies rely a lot less on brokers nowadays to provide them with post meeting feedback, and rate quality targeting and introductions at upmost importance.

  • Growing ESG focus — The survey notes that there has been a strong increase (from 37% to 46%) in companies who have strategies in place to communicate with key investors on corporate governance issues on a regular basis, with top issues addressed being Board composition (76%), Transparency and disclosure (71%) and Remuneration (60%). Despite that the actual number of investors who reach out to ESG focused investors is still low (30%), however likely to rise. There is evidence to suggest that institutional investors are increasingly committing to ESG-focused principles in their strategies — whether that be through a more active engagement as shareholders or divestment strategies.

Source: BNY Mellon Depositary Receipts Market Review 2015, BNY Mellon Global Trends in Investor Relations 2015

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

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

The Economist: The Fintech Revolution

This week’s special report in The Economist on Financial Technology (or Fintech) talks about the new wave of ideas changing traditional finance, from payments to wealth management, crowd funding and digital currencies. Fintech start-ups continue to attract record investment year-on-year from the venture capital community, and many are long past the experimental phase. The report also discusses the uncertain and evolving relationship between fintech and traditional banks.

As we have pointed out in some of our previous posts, despite the fact that many of the most relevant trends in this space are still nascent or emerging, there is huge potential for them to impact the asset management industry and subsequently our world of investor relations.

For those fairly new to the subject, you may find our basic Fintech Dictionaryuseful in explaining some basic concepts and definitions.

A few points from the Economist report in particular caught our attention:

  • Although the amount of assets managed by automated wealth managers (so-called ‘robo-advisors’) doubles every few months or so, the global total is still only around $20bn, compared to roughly $17tr for traditional managers. The argument in favour of robo-advisors, which mainly utilise indexing strategies while staying clear of mutual funds and individual stocks, is that they can use algorithms to provide sound investment advice for a fraction of the price of a real life advisor. The majority of the take-up so far has been from clients under 35 with an average account size of less than $100,000. It is interesting to note that Schoders, Goldman Sachs, Vanguard, Schwab and JP Morgan Chase have all either made direct investments in robo-advisory platforms or are planning to launch their own.

  • The electronic ledger ‘Blockchain’ is the technology behind the digital currency Bitcoin. Blockchain offers a decentralised, public account of all Bitcoin transactions. Enthusiasts believe its application in the financial markets may be much broader; in theory the technology could be applied across a wide range of applications, such as the issuance and trading of securities. Unsurprisingly, a number of large financial institutions, as well as exchanges, have taken steps to explore this further.

  • Providing financial services to millions of customers, especially to those in populous emerging markets in Asia and Africa who previously had no access to them, is another area that fintech looks to address. While only 25% of people in Africa have access to a bank account, over 80% have a mobile telephone. Taking advantage of this gap is M-pesa, a Kenyan phone based payments scheme now used by three quarters of adults in the country. As these concepts evolve it is fascinating to think about the possibilities and applications for providing credit, retirement and investment solutions to millions almost overnight.

We will continue look at some of these ideas in more depth over the summer.

Price of Silence

Researchers from University of Texas have recently analysed roughly 50,000 post-earnings conference calls between 2002 to 2012. They have found that when company executives did not receive significant feedback or questions from analysts during the Q&A section they could expect their company’s market capitalisation to fall between $4.3–6.1m in the next five days. The authors say that earnings calls can help improve transparency and information flow, however without analyst engagement the economic consequences may catch up with you.

The Price of Silence August 04 2014

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.

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

Home bias persist amongst global investors

Despite the benefits of diversification, institutional investors in most countries have a strong home bias, buying shares in companies that they know and ones that trade in their local markets, according to the latest report by Goldman Sach’s José Ursúa.

“We estimate that over the last decade, domestic holdings of broadly-defined domestic equity in developed markets (DM) have gone from around 81% to 76%, and from 90% to 88% in emerging markets (EM). This ‘home bias’ is visible not only in equities, but also in debt securities and other assets.”

Trade barriers are no longer a likely obstacle. Goldman notes that the behaviour continues despite decades of financial liberalisation, which have “removed obstacles to capital mobility around the world” while technology has enabled more efficient trading, and information flows have become “considerably more fluid.” Perhaps asset managers feel considerably less connected and engaged with companies outside their home market, an area which we are working hard to improve. Couple of charts below from the research caught our eye. Those may be useful in IR Strategy and institutional investor outreach planning.

Sources: Goldman Sachs, Financial Times, CityAM

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.

Basic:

  • 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