In the first of a series of guest posts, we invited Clive from IR adviser, h2GlenFern, to write about how the current crisis has effected public companies and their need to communicate, with the correct tools they need to do so.
Impact of changing equity market dynamics
Well before the emergence of Covid-19, the consequences of the MiFID2 regulations were starting to manifest themselves in the equity market with increasing investor self-sufficiency in the investment research process and decreasing levels of broker resource and input. More recently, we have seen a resurgence in retail investor engagement with data suggesting that some 20% of trades in the UK in March were by retail investors. This compares with 13.5% of the UK stock market held by UK individuals in 2018 and only 10.2% in 2008. And finally, events of the last 9 months have only exacerbated the need for clear and efficient communication of the materials investors require to assess and monitor investment opportunities.
So, the fundamental question that needs to be addressed is:
Do we have the right toolkit (content and structure) to service an increasingly self-sufficient and retail-orientated investor audience with the materials they need to assess and monitor investment opportunities?
IR websites overtaking annual reports
Historically, the annual Report & Accounts was the core source of information for investors, with assistance and support from brokers. However, annual reports have become significantly longer and increasingly more turgid and broker input on ‘maintenance research’ has diminished substantially post MiFID2, so IR websites are increasingly more important in assisting fundamental analysis.
This significance is likely to increase further in light of the consultation recently launched by the Financial Reporting Council to consider ways of improving the effectiveness and engagement of the investment community through better financial reporting. The toolbox itself, remains the investor relations website as the preferred and logical go-to site for information.
Essential tools for the IR toolkit
In the interests of efficiency and effectiveness it is important to check that your toolkit, the IR website, is fit for purpose in terms of both functionality (how it is constructed) and content (the tools it has in it). There is not the space here to review every element but some key components to highlight include:
- The investment proposition. Huge emphasis is placed on determining the investment proposition at the time of an IPO, but often little attention is focussed thereafter. Do you have an investment proposition? Where is it? No good being on page 17 of last year’s Report & Accounts, it needs to be on the website and centre stage – addressing the question, “why should I consider investing in your business and why now”?
- Addressable market data. What are the dynamics, characteristics and trends of your addressable markets? What can you tell me and what 3rd-party data is available to inform me? If you can attract attention to the markets you address it will be easier to position your business model.
- ESG Policy. ESG is not a new topic but over the course of the last couple of years investor interest has moved on from a box-ticking exercise to highlight how many plastic cups are recycled to a desire to know how your ESG policies help to make your business better. More recently still, focus has been on the ‘S’ in ESG as reactions to Covid-19 are scrutinised – how do you reconcile dividend payments with the furlough scheme, for example. So ESG needs prominence – not to be tucked away within Vision and Values.
- Capital allocation policy. Investors want to know how you decide to deploy your capital and how you allocate the cash that you generate. Does the funding of organic growth come before dividend allocations and what are your balance sheet criteria? These and related questions can and should be addressed in an appropriate schematic, prominent on the IR website.
- Consensus estimates. Much of the valuation analysis that investors undertake is driven by consensus estimates of future financial performance metrics. Therefore, it is important that such data is not only accessible but also accurate. For example, do the consensus numbers reflect the latest trading update and have they been aggregated on a consistent basis? Important to include consensus estimates on your website, so all followers are working off the same basis.
- Complementary third-party services. Over the last 2 years a number of new services have emerged to support investor engagement, and these should be considered as integrated tools support the investment process. For example, the Investor Meet Company (www.investormeetcompany) provides a platform-based system to allow retail investors greater access to company presentations and events.
To service the changing needs of the investment community in the most efficient and effective manner, take a look at your tool kit. Is the structure of the tool box as efficient and comprehensive as it needs to be and do you have the right tools to put in it?
Clive Anderson is a partner at h2glenfern Limited and previously Head of Global Transport & Infrastructure Research at Bank of America/Merrill Lynch.