Ipreo in the News
10 July 08
New Realities: Six Things IROs Need to Understand in a Difficult Market
Clients of both firms to benefit from broader range of investor relations offerings
Looking back five years, there's no question IROs faced many challenges - but the challenges they face today are far more numerous and complex. In this article, two of Ipreo's top managers focus on the trends IROs need to confront in order to succeed in today's difficult market.
-
Understand potential sources of activism:
An unstable market was widely expected to derail shareholder activism, which hit record levels in 2007. In the first weeks of 2008, however, there have been almost 50 percent more shareholder campaigns set in motion than during the same period last year.
'Not only is there an increased level of activism, but it's also coming in many different flavors and forms,' points out Bill Sherman, Ipreo's global head of data strategy and analytics. 'Most people equate activism with hedge funds, but there are many 'normal' shareowners joining in.' Last year T Rowe Price, Fidelity and OppenheimerFunds - all traditional mutual fund organizations - took part in activist campaigns.
In a survey of mainstream investors by Ipreo, only 5 percent say activism is not helpful in unlocking shareholder value, while nearly 45 percent say it's beneficial for an activist shareholder to have a seat on a target company's board.
'As the market tightens, the line blurs between activist investors and normal investors,' confirms Paul Lucas, Ipreo's London-based managing director of international operations.'IROs need to understand their shareholders and be prepared for tough questions at annual meetings in 2008.' -
Keep an open mind about hedge funds:
The headlines are all about meltdowns, but the reality is that money is still being added to the $1.9 tn estimated to be in hedge funds today. IROs may need to be reminded that not all hedge funds are activist traders.
'Certain hedge funds are becoming more like traditional investors,' Sherman says. 'They just have the ability to follow different strategies. You need to understand the players, how they behave and the impact they could have on you.' -
Look to the expanding universe of shareholders:
Sovereign wealth funds (SWFs) like those of Kuwait, Abu Dhabi and Singapore have long invested in equities. What's new is the sheer amount of oil money coming back out of the Middle East.'SWFs have been around for a long time, but lately they've been making some very large, opportunistic equity investments,' Sherman observes.
SWFs look like ideal investors: long term, deep-pocketed and keen to diversify. On the other hand, a lack of transparency and a confusing array of management styles make them hard to approach. Norway's pension fund has 28 external managers with 45 mandates; by contrast, Kuwait Investment Office portfolio six things IROs need to understand in a difficult market New realities: This special feature by Neil Stewart is sponsored by Ipreo. IR magazine special feature April 2008 51 managers routinely meet with company managements.
While the US public seems fearful of SWFs, European companies are more used to them, Lucas says: 'They've been investors in European shares for decades, but now their sphere of influence is growing and competition for their attention is heating up.' -
Don't underestimate the effects of other trading:
'There is a growing impact on equities from investors in other asset classes,' Sherman states. The credit crisis is partly behind this trend. Equity analysts are thinking about debt ratings and coverage ratios alongside earnings growth, so IROs need to field more questions about servicing debt, for example.
Lucas says Europe lags behind the US in this respect. 'Institutions are now taking a balanced view across asset classes, so the treasury function has to become more IR-savvy - and vice versa,' he notes, adding that Ipreo is getting a lot more requests for debt-holder ID.
Also watch out for investors building stakes without buying your shares. Using swaps, an investor could control over 5 percent of your stock without filing a 13D. In the UK, as much as 40 percent of daily London Stock Exchange volumes could involve contracts for difference.
Meanwhile, quant investors are sending options trading soaring. 'There have been a few well-publicized quant crashes, but it certainly hasn't gone out of fashion,' Sherman says. The volatility these quants can bring raises a chicken-or-egg question, he adds: 'Is the volatility there before the quants get a foothold, or are the quants creating the volatility?' -
Examine your investors constantly:
Shareholder visibility is declining. The proliferation of dark pools and the growth of algorithmic trading, which breaks large trades up into lots of tiny blocks, let investors trade larger volumes more quickly and cheaply - and they've been doing so in droves. 'There's company uncertainty, industry uncertainty, heading-into-a-recession uncertainty,' Sherman says. 'When the footing is loose, there's a lot of activity.'
It is essential that IROs understand activity beyond plain vanilla shareholder ID. 'Look at any stock's activity identified in public filings and compare it with the volume of stock traded; there is a tremendous amount of activity that goes unexplained,' Sherman says. 'There needs to be an understanding of the make-up of the rest of the volume - by prop trading desks, algorithmic traders and fast money, all of which have an ultra-short-term focus. It requires significantly more effort and skill to track stocks now than it did a few years ago.' -
Be prepared to compete for capital on a global scale:
Not so long ago, a foreign shareholding of 5 percent to 10 percent was an ambitious goal for a US company. Nowadays, 20 percent or more would not be seen as unreasonable. 'As markets become less regulated, it's getting easier to cross borders in search of investors,' Lucas notes.
From investors' point of view, there are simply more places to invest in. 'If you're an IR professional in the US or western Europe, you're now competing for investment with companies around the world,' Sherman concludes.
Neil Stewart
