Beating the blues

Investors don’t want companies to be pinned to share price performance.
In these markets, share price isn’t the barometer of truth it used to be, and most investors acknowledge how disheartening it is for good companies to see such wild volatility. There is a school of thought that, in these unprecedented and unpredictable times, companies should not base decisions on their current share price, as it is not a true reflection of future potential and growth generation. Instead, investors want management to focus on getting the fundamentals of the business right in preparation for the upturn.

Investors want the shift in investment drivers to be clearly understood.
Investors are no longer looking at risk the way they used to. Their organizations are more sensitive to information on debt. One investor gave a good example of what has shifted when assessing a business: previously he ranked quality of the business, return on capital employed, quality of management, strength of the balance sheet and barriers to entry. Today the focus on the balance sheet is much higher on the agenda – as high as second-placed – underlining the fact that the quality of the business is nothing without a balance sheet to support it.

‘We now have no interest in companies with a weak balance sheet, whereas before we may have considered them on a case-by-case basis,’ an investor notes. ‘We also will not consider those that need to refinance.’

Investors want companies to know that they see the value in investing for the longer term and believe markets will swing back.
Unsurprisingly, longer-term investing is back in fashion. Even investors whose immediate focus is on technical considerations believe 2009 will see a swing back to the fundamental end of the spectrum as markets begin to normalize. ‘There’s a lot of value to be had out there, good companies with robust financial positions and low leverage that are currently mis-priced,’ notes one investor. ‘Companies with this profile are right on our radar and we are looking to invest on a longer timescale than before.’

Investors want better monitoring of sell-side analysts by IR professionals.
Investors have been frustrated with companies that have reported numbers wildly wide of analyst expectations, even in these uncertain times. Most investors believe it is a key responsibility of the IRO to help analysts understand all the factors in making recommendations. Other investors say they feel companies still identify too closely with the sell-side analysts. In the future, investors want companies to see them as the end-consumer of financial communication.

‘There’s not enough work done with the sell-side pre-results,’ complains one investor. ‘It’s very important in an environment where misinformation and panic is widespread that we see numbers coming down smoothly. If the numbers need to be talked down, that must be done across the board and not just with favorite or friendly analysts.’ 

Investors want improved transparency, particularly around debt.
Although a company’s level of transparency has always been something high on investors’ wish list, shareholders continue to look for more openness.

This is particularly the case in relation to how a company reports on debts and covenants: ‘There has to be absolute honesty and openness from a company about its balance sheet and leverage position. We are now looking only at firms that communicate clearly and present all the facts about their liabilities.’

Investors want more independent contact with companies – and they are prepared to give a bit more in return.
Investors want to be introduced to buying opportunities and are increasingly reluctant to pay for company access. The investors who meet with management as part of their decision-making process admit stepping up the level of interaction and reaching out to ailing companies within their portfolios, offering advice and, in one case, financial support in place of a bank.

‘As equity holders it isn’t in our interest to let a good company get into difficulties that have been exaggerated by difficult market conditions,’ explains one buy-sider.

Investors want IROs to be more familiar with their investor base.
Many investors feel the companies in which they invest don’t know nearly enough about who really owns the stock. They consider this to be one of the most important points for IR to address in terms of targeted communication. Traditional investors in particular urge corporates to get behind ‘hidden holdings’ and work harder at finding ways in which to uncover more of the register.

‘I am still surprised companies don’t have a better handle on who owns their stock,’ says one buy-sider. ‘Maybe it’s down to the fragmented relationships the bankers and brokers have with different groups of institutions. From here on companies need to take ownership of their investing universe.’

Investors want to keep meeting management – now more than ever!
Investors want management to stay visible and continue communicating a clear vision of the company and its current situation in relation to market conditions. Investors still don’t like being overly involved at meetings and roadshows. They would rather be included in smaller-scale events, and a few investors say they will not be attending large sponsored events in 2009, as these rarely present buying opportunities.

Investors also feel management should focus on quality not quantity when considering a round of meetings. High-level managers want to attend only if they know they are being invited alongside other high-level managers. The feel-good factor for portfolio managers cannot be overestimated: ‘Bad news told well can hurt a lot less. We want to meet management more than we did in the past.’

Don’t crow if you can’t show.
While investors highlight the importance of meeting companies in good times as well as bad, they also recognize that if a company has issues to address, management should get its house in order before approaching the market. Investors want more honesty from management about successes and failures.

‘Companies really need to start thinking about communicating more in line with their shareholders’ interests,’ says a buy-sider. ‘I am tired of hearing companies hooking their failures onto a sector or wider market issue when it has been blindingly obvious for a while that things were not right.’

Investors want to meet boards of directors.
Investors feel executive management is often transitory, with some CEOs holding roles for only two years or so. Investors believe, particularly in light of the financial turmoil of 2008 and the potential for a slow recovery, that the chairman and the board should take a much more active role in setting the longer-term strategic objectives of the firm.

Furthermore, they should then be responsible for taking that vision to investors, giving them the opportunity to cross-examine it and align it to the performance of the business.

Investors already recognize an improvement in the overall standard of IR, but they want it to go further.
The recent financial turmoil has brought the role of the IRO to the fore. For some investors, a function that just a few years ago was seen as little more than an administrative or supportive role has now developed into a more technical position that understands the proximity to the underlying drivers behind the management accounts of a company.

Almost all the investors agree, however, that IR as a function needs to improve its communication on debt and the balance sheet. All the investors we spoke to feel there is still a lack of debt transparency: ‘Not enough IROs know enough about the debt side of their business; they should be in a position where they can answer questions on it if asked.’

Kirsten Molyneux is IR director at Gavin Anderson.


Note: The 20 buy-side interviewees were from long-only value and growth funds, hedge and fixed-income funds, and funds of funds, with a total of around $200 bn under management.