VICTORIA GEDDES, EXECUTIVE DIRECTOR

Aug 5, 2016

Results season has kicked off. While some companies are already out of the blocks, most are well into planning mode with ASX releases being drafted, presentations put together, Q&As assembled and the investor roadshow organised. For management teams it is often a gruelling process, but spare a thought for the fund managers and analysts that receive dozens of such announcements and briefings. Over the space of 2-3 weeks they have to analyse large amounts of information and make judgement calls on whether stocks they hold should continue to be part of their portfolio or replaced by others.

So what does the buy side look for and expect from Corporates? Are the expectations that some companies have from them unrealistic?

In June this year we attended the major annual investor relations conference in the US and picked up some interesting insights and data from studies undertaken by US perception research provider Rivel Research on the buy side and how they engage with companies. While Rivel’s studies tend to be focused on Europe and the US, the insights gained are highly relevant to Australia.

Targeting new investors – it takes time

How many times do you need to keep targeting or meeting with an investor who is not on your register? Given that one KPI for investor relations professionals can be around converting an investor meeting into a long term shareholder, it is helpful to have some realistic expectations.

• only 12% of institutions say they are likely to buy a company’s stock after the first meeting
• 42% of institutional investors would not invest in a company without first having met with the CEO
• institutions need to have had, on average, at least three meetings with a company before investing
• multiple people are typically involved in making the final investment decision, so if a company has only ever met the same person at a fund manager, this is unlikely to be a good indicator of pending investment intentions

What can companies do to impress the buy side?

There are multiple factors that will contribute to the buy-side’s decision to invest in a particular stock, many of which sit well beyond the reach of an individual company’s sphere of influence. However, of the 6 most important factors identified by Rivel’s research, half are completely within the control of management:

• In-house research (75% of respondents take this into account)
• One on one meetings with management (65%)
• Results briefings (57%)
• Statutory financial filings (54%)
• Analyst/investor days (51%)
• Annual Report (48%)

 While it might be tempting to assume that a company’s outlook for earnings growth and the strength of its balance sheet would be foremost in an investor’s mind during the decision-making process, the research suggests otherwise. Of the top 6 drivers behind an investment decision, EPS growth and capital management rank only fifth and sixth respectively:

• Management credibility (75%)
• Effective business strategy (72%)
• Reliable cash flow (72%)
• Sustainable margins (61%)
• Prudent capital deployment (60%)
• Attractive EPS growth (59%)

This emphasis on management credibility, strategy and cash flow is an outcome of the market’s experiences over the past 15 years, including the dotcom bubble and the GFC. Prior to 2000, when Enron and WorldCom suddenly brought governance and quality of management into sharp focus, growth in earnings consistently ranked number one.

Targeting – make sure you get it right!

Targeting practices by companies are often missing the mark. When the buy side are asked about meetings they have with companies who are seeking them out as potential investors, most are unenthusiastic. The major reasons given are that most companies they see are:

• Not a fit for their investment style
• Based in a country in which they are unable to invest
• Too big or small by market cap for their fund mandate
• In a sector which they don’t invest in
• Listed on an exchange they cannot invest in
• Not covered by a sufficient number of sell-side analysts
• Not in an index

81% of analysts cite “poor fit for their investment style” as the greatest dampener of buy-side receptivity. It is not surprising, therefore, that only 14% of the 350 fund managers surveyed were enthusiastic about such meetings, with another 50% “somewhat receptive”.

The comment of one fund manager is instructive:

“An IRO needs to know the things that I own so he can get a sense of the types of valuations that tend to be attractive – what types of companies and businesses that I like to buy.”

The lesson here is that adding potential new investors to your roadshow is not a simple exercise. Despite this, Rivel found only 12% of IR budgets were allocated to targeting. In Australia, we know it is accepted practice for many small and mid-cap companies to rely on brokers to organise their meeting schedule.

Effective targeting requires access to sophisticated databases, an understanding of how financial markets operate, expertise in peer analysis and experience in knowing how to filter and interpret the mountain of data that is available on a multiplicity of platforms. Most of all, it requires time, which many IROs and C-suite executives typically don’t have in abundance. In this context, Rivel’s finding that only 50% of companies that are actively engaged in targeting investors use external IR specialists suggests there may be a ready solution at hand.