The Demise of Value Investing, and the Language of Human Capital Disclosure
Week Ending 13 September

Conferences conferences conferences – yes, every industry conference is either this week or next, and no, there is no mercy. That said, the 2019 version of the conference you’re at is likely a bit different than the 2018 version; the attendees are more tied to specific broker relationships than last year and are probably under tighter budgets, and the corporate access and research team are under more pressure to differentiate themselves and hopefully are adding more value beyond arranging the speed-dating tables this year. Get back to it, but pro tip - leave a manila folder on that chair along the wall in the hallway so everyone walking by thinks it’s taken…that’ll save you the hunt to find the next chair down the hall to make your intersession calls.

So, with that in mind, here’s the latest news from the IR world.

Buy Side

- A recent piece from IR Mag dissects CFA Institute’s position paper entitled The Future of Research in the US After MiFID II. The Institute makes it clear that the European regulation pushed US regulators to a place “they did not want to go,” going as far to say that the European regulation is “…causing tectonic shifts in the competitive balance between asset managers, brokers and research providers.” The paper provides six specific recommendations for asset managers and the SEC, including revising the definition of best execution and improving reporting to asset owners, around a theme of transparency. “Greater transparency around how much investment managers pay brokers and others for research is something asset owners have long wanted, and something CFA Institute has recommended since the release of its original Soft Dollar Standards [in 1998],” according to Jim Allen, head of Americas capital markets policy at CFA Institute. (Tim Carr)

- Changes to corporate access continue, especially the expansion of internal buy-side corporate access teams. We liked this IR Magazine interview with Grant Bartucci, associate director of corporate access and broker relations at Point72 Asset Management, a name that pops up on the shareholder base of numerous issuers. In this article, Bartucci explains his role at Point72, the impact of Mifid II on corporate access and how companies should engage with his firm. ‘We want to develop meaningful relationships with companies so that we can create a consistent and compliant two-way dialogue,’ he says. (Hal Garrity)

-Lots of ways to take this article, “Can AI Help Make Active Strategies More Marketable?” from Bloomberg – the synopsis is that the few quant-managed active ETFs have not outperformed the market and thus aren’t building large asset bases. However, what’s left unsaid here is that Renaissance Tech, AQR, and other quant strategy hedge fund providers have proven very effective in setting up trading models that benefit from AI…but they charge 2 and 20 (or more), don’t have to publish either their portfolios or their returns publicly, and as the article mentions, don’t face distribution requirements that can force liquidity events like standard mutual funds do. Of course, we’ve seen media mentions of non-transparent ETFs that might mitigate one of those differences down the road. But, if there’s an ETF manager that can square that circle, the spoils might be limitless.

IR Best Practices 

- If you read no other academic, IROs should at least read the work of Baruch Lev of NYU, who’s developed a solid reputation over time with a focus on the IR community, including two books (here and here) written specifically for the field. The thrust of Lev’s last book fits into the frame of this piece, Explaining the Demise of Value Investing…which is an excellent “think-piece” for plane reading during conference season and may help you understand the thought process of your investors. Lev goes through a number of the reasons why value investing has performed so poorly. From an accounting perspective, an increasing amount of the overall value of companies sits in intangibles, which are naturally tougher to measure, and even with the push to capitalize these intangibles on balance sheets, it still remains difficult to isolate intrinsic value.

Lev’s other angle is that mean-reversion hasn’t been occurring nearly as much since 2007 as prior – and chalks this difference up to factors including tighter lending standards and limitations on access to the capital markets for the weaker-performing companies, while capital has flowed more easily into stronger-performing firms. Lev is split in the performance of “value” versus “glamour” firms by industry and size might be something you hear in microcosm from investors.

-The 2020 version of you will thank the 2019 version for spending a bit of time reading “Human Capital’s Big Reveal” on – yes it’s a long read but well worth the effort, as now not just investors but the SEC is expecting to push companies for material human capital disclosures, you’re going to need to respond at some point. This article goes through the ISO 30414 standard for human capital reporting and some of its issues, most importantly, the increased disclosure that can be used for competitive reasons. One interesting sidebar comes from a Deutsche Bank research piece – an exceedingly simple calc called human capital ROI ((total revenue – labor costs) / labor costs) is one way to look the impact of the leverage on talent, and DB shows it has some correlation both with short-term price returns and ROE. In any scenario, if you’re not versed already, you’ll need to learn the lingo of human capital disclosure – this piece is a great first step.


- Here’s the third leg of the stool for the investment stewardship reviews from the passive world – the PR departments of Blackrock, Vanguard, and now SSGA have been considerate enough to release them in consecutive weeks to avoid burying any of their individual leads. SSGA’s Asset Stewardship Report goes a bit deeper than the others; first, its descriptions of its engagements, including the mention that 85% of its engagements are initiated by SSGA, with just 15% initiated by the company. SSGA then covers its key themes for those 85% of engagements – companies in the retail, pharma, and materials space may want to read a bit deeper on these sections into the issues that SSGA is pressing on, especially if you haven’t received inbound requests yet. Finally, each company SSGA engaged with is listed, with a breakout of the type and theme of each engagement – a read of your peers / industry might give you some ideas as to what to expect for your company.

Separately, this Institutional Investor piece looks specifically at SSGA’s governance engagement, pointing out that SSGA filed votes against 40% of 66 companies that did not meet their initial governance screens after engagement. We’ve seen plenty of concern in academic and legal circles about the growing power of the “Big Three” – greater transparency from each firm may actually be a business decision, not just a courtesy, if you get our drift...

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