All Things Small & Beautiful

The honeymoon is over. The invoices are finally going out from the sell-side to the buy-side for research and access. The buy-side is waking up to the new reality, and issuers are finally being made aware that MiFID II really does have a bite.

Our research tells us that there has already been an average 15% reduction in the number of investor meetings for FTSE 350 issuers in the first half of 2018 against the same period last year, with smaller companies faring worse than larger companies in terms of number of events and number of meetings. The anecdotal evidence suggests lower quality of investors being put on schedules and the return of the ‘hedge fund only’ roadshow is definitely with us.

On the sell-side, the predicted analyst ‘brain-drain’ seems as yet to be more at the bulge-bracket banks than the mid-tier brokers, with sectors being dropped on a case-by-case basis and the related folk moving to the buy-side or hedge funds.

The mid- and small-cap oriented stockbrokers are clinging on to life in some cases (though some are in robust health) but we have a crisis of over-supply that is being driven by forces outside MiFID II. As discussed in previous columns, the number of equity issuers in the UK continues to fall at what some  may see as an alarming rate, as fewer companies come to the market than drop out of the listings due to M&A or heading into administration.

Clearly, as with the asset management industry, consolidation of the sell-side is going to gather pace over coming months but those who predict the death of the sector are as mistaken as those doomsayers of 20 years ago. This is not, however, to deny the major dent in support for small-cap companies that the current scenario induces in terms of research and equity distribution.

Much has already been written about the role of independent research, especially with regard to small- and micro-cap companies, and clearly this has been a growing industry over recent years – but companies often view this research as a necessary evil. While some private investors may relish independent research, the effect on the professional investor is less clear as this is less researched. The more problematic issue is the number of funds and fund managers that will buy outside of the FTSE 350. Independent research needs to be read and acted on to make commissioning it worthwhile.

In terms of equity distribution, the same problems apply – the thresholds for investment have gone up at many small- cap funds as the appetite for risk has decreased, thus exacerbating the lack of liquidity from which many small-caps suffer, especially those with lower free floats.

The role of the broker

Many small-cap companies do not have a dedicated IR resource and so rely on their broker or brokers completely for their equity distribution in the sense of meeting new investors. In this world, ‘targeting’ means having a roadshow set up by your broker, not a thorough and in-depth piece of global market research as one would otherwise understand it. The company’s equity investor horizons are limited by the broker’s institutional investor client-list – and this limited distribution model is now even more restricted because many of those institutional clients are refusing to pay the broker the ‘concierge’ fees required under MiFID II to set up the meeting.

The broker client-list distribution model is often restricted geographically at the smaller brokers. They do not generally offer distribution to investors outside the UK. This means that growth companies may not get the maximum capital support they need because they do not have access to otherwise suitable funds in Europe or elsewhere.

Of course, many non-UK investors have constraints on investing into AIM stocks but for Main Market issuers it seems sub- optimal that they may not receive the benefit of wider relevant distribution due to the distribution model. However, it seems likely that the smaller brokers not offering more widespread distribution will not survive the market cull that MiFID II will bring, directing issuers towards the larger mid-market brokers who do offer a more global reach.


The conundrum is that the companies which are likely to fare the worst under the new rules are those least likely to have a dedicated in-house IR team – or indeed, use an external IR adviser. We are seeing a ‘trickle-down’ currently in the sense of more small-cap companies taking on an IR professional, but it is certainly not yet a flood. This is understandable – if senior management did not understand the partial nature of the equity distribution model pre-MiFID II, then they are less likely to comprehend fully what the new rules mean for their company and equity, especially if, for the moment, the world seems a lot like it was before the change.

Given the decreasing institutional interest in small-cap stocks, the next layer of capital has to be discretionary retail investors: private client stockbrokers, wealth managers, family offices, private client fund managers etc. These investors are a lot easier to reach and handle than ‘pure’ (self-directed) retail due to the collective nature of their investment, but there has been an uptick in the hurdle number to get on their stock lists over recent years. Many PCBs will now only include FTSE 350 companies on their buy-lists.

There is a strong tailwind the UK towards individuals using online execution-only platforms for their investments, eschewing the role of the investment professional to manage their money. The discretionary retail sector remains (and will remain for many years hence) a valuable source of capital for smaller companies, but keeping private non-discretionary managed investors informed of the equity story via active and ongoing media campaigns must also be part of the small-cap IR strategy.


Some commentators have provided a contrarian view to the more standard ‘doom and gloom’ scenarios for small- and micro-cap stocks. The argument is that with less sell-side coverage and with less ‘old- school’ institutional money flowing into the sector, there will be more opportunities for the nimble ‘boutique’ specialist investor to find hidden gems and make spectacular returns. Some predict a new Golden Age for small-caps in the UK market, but I wonder if this is somewhat farfetched. Certainly, there is likely to be a price uplift in this sector of the market due to the increasing scarcity value of small-cap stocks. Given that there are still over 1,700 equity issuers across the Main Market and AIM at the time of writing, the market place remains crowded and small-cap companies need to shout loud to get noticed.

Small-cap and large-cap IR practice is broadly similar in terms of basics but the upside potential for smaller companies who have not carried out systemic IR in the past can be tremendous. One merely has to get past the inured acceptance of historical market practice among some small-cap senior management to the realisation that reliance on the broker equity distribution model alone may not provide them with the optimal share price performance they may well deserve.


Richard Davies delivering the opening remarks

RD:IR’s close relationship with the IR Society came to the fore again today, with Richard Davies, Managing Director, curating and moderating a thought-provoking IR Masterclass, hosted at the offices of Instinctif Partners on Gresham Street.

Richard began with some opening remarks about the changing nature of governance, before Mark Robinson, Head of EMEA Issuer Services at RD:IR, set the scene for the morning with a review of current levels of shorting in the UK market. Mark noted that FTSE 100 stocklending seems fairly unchanged since the Brexit vote, perhaps due to the global focus of issuers in the index. In contrast, the level of stocklending in the FTSE 250 has risen over recent years and continues to rise, as the index is very domestic-focused.

We will be publishing a White Paper on stocklending over the coming weeks, with in-depth detail and analysis. Following Mark’s observations, Richard moderated a panel discussion on shorting, involving Matt Hall from Corporate Broking at Deutsche Bank, Jeriel Rivera of FMR Investment Management, and Steven East, formerly a senior sell-side analyst at Credit Suisse. A key takeaway from this discussion was that corporates should speak to those investors shorting their stock, rather than ignoring or refusing to talk to them. IROs must find out why an investor is shorting their stock: has the investor misunderstood part of the business, or do they know something the corporate doesn’t? Being transparent and communicating well to the market is always the best course of action. In addition, if an IRO avoids speaking to an investor, then that investor may begin to wonder what the company is hiding and could take a negative view.

As well as engaging with short investors, a successful approach to disarming them is for a company to publish all news, good or bad, as soon as possible. Investors tend to short stocks when they are aware of something bad beneath the surface that is being suppressed. If the company makes that news public knowledge, the chances are high that it will then be factored into the share price, meaning there is little benefit in shorting the stock. This is also simply good practice – to be honest and transparent with the market – to maintain a good relationship with investors and have a true share price that reflects the company accurately.

Following the panel discussion, the floor was handed to Victoria Sant of The Investor Forum. She discussed what her organisation does in the corporate governance space, by working with investors to help amplify their voices to the boards of the companies they are invested in. Key points highlighted by Victoria include the need for the quality of dialogue between investors and boards to be improved, especially as too much time is spent on remuneration and not enough dedicated to long-term aspects of a business – for example, culture and ethics. Essentially, a board’s focus should be on long-term value creation as much as short-term issues.

The third item of the day was a governance briefing and debate, involving David Styles of the FRC, Rupert Krefting of M&G and Charles King of Halma plc, again with Richard Davies moderating. As Director of Corporate Governance at the FRC, David Styles set the scene for the debate, reminding the audience that the new Corporate Governance Code for 2019 is in fact two-thirds shorter than the current iteration. It goes without saying that shortening this document has, of course, been widely appreciated! The new Code takes the approach of asking companies how they apply its principles in a way that shareholders can evaluate. There was also a loose promise from David that the Code will not be updated for another 18 months at least. With the current state of global affairs, whether this happens or not is anyone’s guess!

The governance briefing included the thought that asset managers need to do more to engage with the companies in which they invest. Investors are spending more and more time thinking about ESG and how the companies they invest in approach the E and S as well as the G. However, a big challenge to companies at the moment is engaging with all shareholders. This is because there are so many quant investors that only stay invested for short periods, as well as index and other passive funds that do not necessarily seek engagement.

To close the morning, Richard Davies interviewed Anita Skipper, formerly of Aviva Investors. Anita has a decorated career and has worked in the corporate governance space since 1993, meaning she is well-positioned to comment on current practice. An interesting point Anita raised was that the average holdings for an investor have decreased in time over the years. When she started out, it would have been around seven years, but now it is around one year or less. This ties in with the point about engaging with shareholders being difficult: there is a higher turnover within each company’s shareholder base these days. Having said this, Anita noted that there is an increasing amount of corporate governance departments at investors speaking with the IR departments at corporates. This is seen as a good thing, as it shows how investors are now recognising the importance that corporate governance plays in 21st century business. As a departing point, Anita said that it is no longer good enough for a CEO to cut costs of a business and increase its profits, thereby earning a bigger salary. These days, the CEO will have to explain how the cost cutting has been achieved, why the cost cutting has been needed, how the board has acted throughout the last year, and other such similar areas relating to governance of the company.

The morning was interesting and useful, with the main takeaway being that the board needs to ensure a strong communication with investors and the market.

We thank the IR Society for organising the event.

RD:IR works in the governance area with companies to assist their communication with the market, either on a one-off or retained basis. Please get in touch to discuss this further.



On 01 October, RD:IR had the pleasure to sponsor and participate in the Finnish IR Conference, hosted by the Finnish IR Society (FIRS) at F-Secure’s offices in Helsinki. Opening and closing remarks were made by FIRS’ chairman, Marja Mäkinen, with various speakers filling the day. It was a very well attended event, with diverse participation ranging from corporate issuers to legal companies and major local investors. Several newcomers to the industry were also in attendance. The programme benefited from excellent speakers passing on their experiences on subjects ranging from governance to the economy. 

Everyone in attendance at the Finnish IR Conference was very engaging, and credit to the board for making the annual event a memorable one. RD:IR very much looks forward to working with our Finnish partners in the future, having enjoyed working closely with FIRS.

We are successfully growing our client base in Northern Europe, being active in Norway, Denmark and Finland, and these events prove useful for both RD:IR and our clients. They are well organised and a superb opportunity to meet others and discuss the state of the IR and wider investment industries.


Opening remarks by the chairman, Claus I. Jensen

As part of our strong collaboration with Danish IR society Dansk Investor Relations Forening (DIRF), RD:IR was proud to be a Conference Supporter for DIRFDagen 2018. The event, in Copenhagen, attracted around 80 Nordic and European IR professionals. The theme of the conference was How to Navigate New Waters, and proved a topical discussion of some of the big changes affecting the IR profession at the moment, including MiFID II, cybersecurity, ESG and targeting.

Hosted by law firm Plesner in the Nordhavn district of Copenhagen, the event was enthusiastically moderated by Ole Søeberg, the founder of investment firm Nordic Investment Partners, and well-attended by IR professionals from big Danish corporates, service providers, and of course RD:IR as well. The morning keynote was delivered by Carsten Hellmann and Per Plotnikof of ALK A/S, who emphasised the importance of using qualified IR strategies to bring investors onboard before embarking on a big structural change in the business. Further sessions discussed investor targeting, best practice, MiFID II and sustainability, as well as an interactive session on how hacking and cybersecurity can impact IR. A key takeaway is the importance of integrating the business units, and making them talk to each other: the IR people must talk to the ESG people, who must then discuss it all with the PR department as well. Special thanks are given to DIRF for hosting a fantastic and eye-opening event that had sold-out attendance.

The major underlying theme of DIRFDagen was that investor targeting must become more specialised, and more and more funds and firms have a desire for investor meetings to become more worth their time. As the major sell-side firms struggle to adjust to the MiFID II rules, corporate access has become more decentralised, and more and more firms are getting in touch with specialised agencies like RD:IR to create a worthwhile roadshow that actually delivers results. Indeed, as the market crickets chirp louder, and the social media airwaves become more congested, the need for positive and personal IR has never been more important.


Human, All Too Human

The IR Society Conference 2018 included much talk of disruption and innovation, and how these terms map to changes in the IR world, particularly with reference to the introduction of “new technologies” to the sector. We heard how AI and deep data mining are being applied to activities such as targeting, for example, leveraging off the back of the structural changes to the market brought about by MiFID II.

It is worth considering how useful really is the model of disruptive innovation, the concept of the moment in our sector, but which actually started life in the 1997 book, The Innovator’s Dilemma, by Harvard Business School professor, Clayton M Christensen. The theory proposed by Christensen was that traditional businesses risked being undermined by start-up competitors with new ideas. The old would always give way to the new.

The rocks of hubris

Aside from marvelling at the twenty-year time lag between the publication of this theory and its arrival in IR Land (clearly, disruption is not always a speedy process), we should also consider whether the theory really has legs or whether this is another case of old wine in new bottles.

The theory of disruptive innovation, simply put, is that incumbent firms develop innovation slowly and surely but there comes a point when this development goes further than customer requirements. The next stage is that the disruptive firm arrives with an inferior but cheaper product or service, targeting the lower end of the market. The incumbent firms fail to recognise or tackle this perceived low-grade threat, so eventually head to the rocks of hubris.

This model is somewhat different from what we normally perceive as “disruption”, which is that large creaking dinosaur businesses are undermined by new flexible smaller companies with new technologies, effectively disrupting the existing supply value chain.

Christensen’s theory has largely been discredited in subsequent research studies because, as so often in economic theories, the reality does not quite match the model. Incumbent companies have often proven themselves adept at responding to potential disruption by amending their business model and/or developing resistant technology; client loyalty to businesses or brands trumped the disruptors; low-end low-value propositions often end up being stuck at the bottom of the market while incumbents up-scale their offering to greater profitability; new low-cost technologies are themselves often overtaken by the development of more efficient processes by incumbents; and larger companies buy smaller companies which present a threat to market share.

AI and machine-learning

It has been a constant refrain of technological innovation, and indeed innovation in general, that the new will replace the old but this is rarely the case in entirety. Augmentation is more likely than substitution.

Mapping this back to the Investor Relations space, we can see that there have been major moments of change in the last 60 years in this market. Big Bang was one of them and arguably MiFID2 was another. Both introduced a wave of technological change related to their structural impacts.

The development of artificial intelligence and machine-learning will no doubt have an impact on us all, and hopefully in a rather more beneficial way than some would imagine (if Hitchcock were alive today, he would no doubt re-shoot The Birds with a sky full of drones). We have already seen major developments in algorithmic trading and asset management, alongside the dramatic increase in the proportion of public equity held by passive, quantitative and index investors. It was inevitable that there would be osmosis of these concepts to the IR world, especially at this time post MiFID II when the old canard of IR being as much about marketing as information supply has become a lived reality for issuers. Now, more than ever, the IRO’s job is to hunt down active asset managers and they need better tools to do so.

Share ownership

Technology is only part of the answer, however. Technology remains data-blind for the most part, so even the most sophisticated algorithms or data mining programmes crash on the rocks of poor underpinning data. There is limited benefit in building castles of analytical complexity to guide your IR strategy when you do not really know who are your shareholders or who really owns your peers.

At least in the UK we can get a reasonable understanding of who owns our domestic peers through the public ownership data, but this is a luxury not available to many of our European cousins.

In all markets, and certainly in the UK retail sector at the time of writing, stock-lending further significantly muddies the waters of transparency of ownership. It is difficult to tell from the public ownership data what investors really own when 15% of the share register is effectively missing from the lists.

The proto-fashionable model of predicting future behaviour of funds and fund managers based on past behaviour may ignore the considerable biases of these two factor, leading to misleading data outputs and poor IR strategy. In any case, we should be thinking about the impact of human decision- making processes on active funds. There is a complex relationship between portfolio managers, internal investment management processes, stock selection, asset allocation and risk by sector, market, currency and global politics. The lesson of 2008 is that markets often do not run to plan. Many asset management firms and funds are very different beasts from even just a few years ago due to ongoing restructuring of the buy-side, and the risk appetite of a 60 year old portfolio manager may be very different from their 50 year old self.

Human skills

Quant only takes you so far in Investor Relations. Active investors are human beings who want to meet another set of human beings, corporate senior management, before they invest, in order that they can get comfortable with them as stewards of their capital. Some portfolio managers are now trained in reading body language to identify if their potential or current investee company senior manager is telling the truth. Conference and video calls have not yet supplanted physical investor meetings, though perhaps the long-heralded holographic technology of the future will eventually suffice.

Building the relationship between the equity issuer and the investor takes time. Trust is usually not built in one meeting alone. It is important that the issuer understands the investor as much as the other way around. The role of IR is to widen and deepen the traction between the two parties through ensuring adequate contextualisation of the equity story. Technology can play an important part of this process by way of use of audio-visual elements such as video and virtual reality.

Innovative thinking around how you communicate your equity story is as important as the use of technology for either market analysis or message delivery. Getting your equity story right in the first place is paramount. No technology, disruptive or otherwise, is going to help if you have no clear strategy or if you lack transparency in your reporting.

Active asset managers’ demands remain simple: they want a clear explanation from companies of how they make their money and how they will keep on making their money. This essential requirement is not going to be disrupted for some time yet.