I have written in past columns about the changing world of investor relations in terms of the additional demands that are being placed on IROs as a result of those changes. As well as the uncertainty that the Brexit vote has brought to the City, we find that technological development is gathering pace in terms of the formation of new ways of thinking about IR data and processes. The world of investor relations is not immune to the current sense of disruption and innovation.
There has been much comment on the potential changes in the corporate access market brought about by MiFID II. Even though we can only guess when exactly this market Directive will be finally introduced in the UK – it is flagged for 2018 but we have been here before – most commentators are of the opinion that it is coming to our shores, in whole or in part, whether we leave the EU or not.
One clearly flagged outcome of MiFID II has been and will be the seismic shift of the payment mechanism that hitherto existed between the buy-side and the sell-side with regard to research and access. While the exact formulation of the Directive has yet to be revealed through “the finalisation of the EU implementing legislation”, as the FCA website so poetically states, the City has started slowly to come to terms with the proposed changes, though some would argue that many on the sell-side remain in denial, hoping that one day all this nonsense will simply go away.
From the IRO’s perspective, life can either look pretty much the same right now or it can look very different from just a few years ago. We are now living somewhat in a two-tier market system.
For large- or larger mid-caps or for those companies which are more heavily traded or have M&A in the offing, then the banks and brokers remain keen to please. We find that these companies may have to endure the attention of up to 25 sell-side analysts. Sadly, the proportion of those analysts that these companies rate as “good” has fallen sharply over the last few years. It is not entirely the analysts’ fault as they are being squeezed to cover more companies due to the economic pressures being applied to their employers, the banks. However, there is a feeling among many IROs that the quality of sell-side research has drifted down in tandem with the perceived influence of that research on the buy-side. For the first time in my career, I now get regularly asked by IROs of these “well-covered” stocks, how they can stop analysts writing on them because the IROs neither have the time to deal with so many of them nor the belief that what some analysts produce has any value, except as marketing material for the bank.
Alas, on the other side, we have the situation of the small- and micro-cap stocks where there is no coverage whatsoever from the sell-side, including, in increasing numbers, even from their own broker. The institutions have in many cases retreated up the value chain to focus their funds on larger, more risk-averse companies, while either concentrating their portfolios or taking a “closet index” approach to investment to save on research costs. Some wonderfully well-run and profitable UK small cap stocks have been simply left to hang out to dry by both the buy- and sell-side. This flies in the face of the notion of the efficient market and also highlights the fact that hedge funds do not necessarily spot every nugget of deep value going.
Independent research has frequently been cited as taking up the breach for those companies that have been left high and dry but being written about is not the same as being read about, and the small- and micro-cap markets are still very dense, despite the attrition on issuer numbers overall that I have written about in former columns. There are many voices clamouring for attention in this area and a close examination of the UK stock market in terms of issuer fundamentals reveals that not everyone knows how to shout nor what to shout about.
There has long been a need for those smaller companies which have a good equity story to be more pro-active about reaching out to the market and demanding investor attention but the irony is that these companies are those less likely to have an IRO to make this happen. These companies are also more likely to have senior management who have historically relied completely on their broker to provide engagement with the capital markets.
The growing issue now is that these problems of reduction in corporate access levels and dwindling institutional investor support are moving up the ladder of market capitalisation but most senior management without a dedicated IR team will have little idea how to benchmark themselves to know, for example, that meeting so few new investors each year is not necessarily how things should be. There has been a paradigm shift the in the markets but many companies have not yet worked out what that means for their stock in terms of price or demand.
This is, or should be, good news for the IR market in terms of the growth in the number of companies who take on IR professionals for the first time. Given that the proportion of public company equity issuers, excepting investment companies, which have a dedicated IR person remains under 50%, then there is tremendous scope for new IR jobs under the current circumstances.
Of course, agencies and consultants can fill some of those gaps but there are still dozens, if not hundreds, of public companies that will, I believe, over time take on a dedicated IR function.
MiFID II has yet to be fully implemented and there is still scope for vast change in the capital markets ahead of 2018. As I have previously commented, we are at the start of a very long road and if the Brexit vote has achieved one thing, then it is that we are more certain of our uncertainties now than before. However, those fund managers and stockbrokers who think that things will go back to their previous state as a result of the vote are misguided. The changes have already begun.