Is it about time that fund managers returned the favor?
Improved disclosure. More transparency. Better corporate governance. The calls are frequent and well-rehearsed. Everyone on the issuer side of the IR equation knows what fund managers want and most, or at least those with their IR heads screwed on, have been trying to upgrade the information provided to investors.
But what about the flip side of the coin? What would IROs and senior management like most from the investment community? Ignoring calls for a 'fair' (for that read 'higher') valuation, the most common complaint is the lack of in-depth, up-to-date, easily obtainable knowledge about who owns your stock. Transparency of ownership is key to good IR.
The complaint varies in intensity from market to market. Many markets have set stages, such as those laid down by EU directives, at which corporate holdings have to be disclosed. But it is the movement in holdings below and between these stages that is difficult to track.
John Tudor, the new MD at London-based Citywatch, talks about a spectrum of fund management disclosure. He believes the US 13f system to be the most open, based on the mandatory, quarterly filing of domestic holdings by most decent-sized institutions – albeit subject to a frustrating time lag.
Next we move onto the UK, where institutions are fairly willing to declare holdings hidden behind nominees but often have to have the information 'pulled' out of them by the onerous filing of Section 212 notices by companies. The 212 legislation requires investors, when requested, to detail their holdings.
According to Tudor, it's then all a bit of a slippery slope downwards across continental Europe and on to Asia in terms of the willingness of investors to provide information on holdings or the regulated ability of issuers to drag it out of them. In many European markets the situation is clouded by the existence of bearer shares which mean companies don't have a shareholder register (let alone a regularly updated register) on which to start their IR activities. One French IRO likens it to finding your way in the dark while wearing sunglasses.
It would be wrong to tar all continental European or Asian markets with the same brush. A recent International Investor Relations Federation survey indicates some of the differences between markets. France, despite a reliance on bearer shares, has introduced measures to improve the level of holding information through the Bourse and Sicovam, the clearing and settlement organization. In contrast, Germany is playing transparency catch-up, despite recent moves by the Deutsche Borse. Meanwhile, Sweden stays ahead of many continental European markets by publishing a twice-yearly Public Shareholder Register and Register of Nominee Shareholders.
Then you get to the worst offenders. Many Swiss institutions prefer to remain cloaked in secrecy; Singapore's state-backed fund managers believe openness is almost a sin; and then someone tells you that getting holding information out of the Abu Dhabi Investment Authority is like getting blood out of a stone.
Right direction
But things are moving in the right direction. Adrian Rusling, a partner at Brussels-based IR agency Kuhn Partners, has just completed an annual survey of European ownership. He believes that institutions are becoming increasingly helpful in detailing how much they own in a particular company and that fund managers are now much more open to actually say what they think. That's as opposed to thanking everyone for an excellent presentation and then running off to ditch their holding. Rusling also points out that five years ago Kuhn's pan-European survey of ownership would get about 300 responses from institutions across the UK and continental Europe whereas today that's up to around 500. He admits that he and his colleagues have 'marginally' increased the number they are contacting but nowhere near enough to warrant the rapid rise in responses.
'There's definitely a quid pro quo attitude in all of this,' says Rusling, adding that if fund managers know that they're going to get access to good meetings with the companies in question then they're more prepared to provide information. 'It's a two-way street and obviously the level and quality of disclosure varies across institutions. You've often got to go and leverage good relationships with fund managers.'
Not surprisingly, most IR agencies play upon the fact they have personal relationships which can draw out information from the institutions. Despite this desire to talk up their abilities, there seems to be a consensus that European institutions are moving in the right direction.
Several of those contacted who regularly conduct shareholder identification programs of one sort or another cited a positive trend. 'Most fund managers are now reasonably cooperative,' says Neil Ryder, of London-based Sage Partners. 'When you go talking to them on behalf of a particular company they are pretty reasonable in giving either an exact, or at least a fairly good, figure.' Bill Trelawny at Citigate Dewe Rogerson concurs as far as the UK is concerned but notes that continental European institutions can be more difficult. Both advisors stress that in many cases the levels of secrecy depend upon who you get to talk to in each institution. As with many other areas of life it depends whether they're having a good day.
You've got it easy
Klaus von Kobylinski was having a good day at a recent IR conference in London but he could not believe the high level of shareholding information available to UK corporates. The director of project finance at German tire and automotive systems supplier Continental, intimated that his life would be a lot easier if he was blessed with a shareholder register rather than trying to find out who holders are within the constraints of the bearer share system.
'It's a real problem. It's all a bit foggy,' complains von Kobylinski. He explains that he uses a number of techniques to try and maintain a grip on who owns the company but is continually frustrated by cost, time, poor information from investors and more. Continental pays for an annual search by German banks to detail who and what makes up their holdings in the company; it employs brokers to add their bit; it mixes in any holding information provided by the Deutsche Borse; and tops it all off with an annual report on holdings by an IR agency. This all gives von Kobylinski a good idea as to who the investors are but levering upon good, up-to-date shareholding information to move to a more advanced IR strategy like his US counterparts is something he can only dream of.
Gerard Paap, manager of group IR at Dutch insurer Aegon, has similar complaints. 'It's a big problem with bearer shares. I think if we had registered shareholders it would all be rather easy,' says the former fund manager. He complains that many of his erstwhile colleagues at Dutch pension funds prefer to keep holding information too close to their chest to make IR life easy for issuers. It is possible for Paap to find out the holdings but only if he personally takes the time to call round all of his chums in the institutions. And time constraints mean that's not always possible. He's surprised that continental investors do not want to play more of the quid pro quo game. In fact, some of them are still not that fussed about setting up meetings with the companies they're invested in so see little point in providing the information. 'We have much better contacts with UK and US investors than with [some] in the Netherlands,' says Paap.
At their fingertips
Certainly, UK companies have it easy in many respects relative to their continental European counterparts. What with shareholder registers, registrar services, 212 notices, a broad range of specialist information suppliers and more, their knowledge of who owns their company is relatively detailed. Robin Key, for example, head of the IR department at SBC Warburg in London, believes that the current system allows for excellent shareholder identification of up to 90 percent. Clients might like to note that he sees little need for improvements to the current system.
Others take a slightly different tack. Sure the 212 legislation is there but it's heavy on paperwork and the onus is always on the company or its advisors to undertake and pay for the search. Likewise, although many UK fund managers are receptive to the idea of disclosing their level of holdings, there are others which have a policy of keeping things under wraps. Phillips & Drew and Mercury Asset Management were mentioned by several IROs and agencies as being reluctant to divulge holding information – even if a survey is being done directly by a corporate. Again, it can depend on who you ask and on what day. Key at SBC Warburg, on the other hand, notes that Phillips & Drew (members of the same group as Warburg) is relatively open with information. A Phillips & Drew spokesperson merely says that it abides by all disclosure of holdings regulations and is open to sharing such information with companies in one-on-one meetings.
'There could be scope for some of them to be a little more open,' says Duncan Shearer, managing director at Sharetrak, the London-based shareholder identification company, although he adds that in many cases it's a question of whether the back office compliance departments are up to scratch with their figures (see We think we own you...). Shearer puts this into perspective by pointing out that some of the larger institutions might have 3,000 companies seeking holding information. Obviously, continual requests might get a little tiresome. 'If you can go to an institution and have a rough idea of what their holding is, then you can usually have an open discussion with them.'
Some institutions put up the excuse that releasing information about their holdings might give away competitive information. Somewhat ironic, considering those same institutions scoff at similar arguments against increased disclosure on the part of companies. 'It's a well-seasoned argument and in many cases you can understand why they take that view,' says John Tudor at Citywatch, but he believes it is way off course. He points out that most institutions will have holdings in one company split across many portfolios so releasing a total figure (if they have it to hand) will give no indication of overall strategy for any fund. 'People miss that point and get concerned about giving away reasons for their success.'
To be fair to the institutions, there are many which recognize the need for a two-way discussion and are ready to provide feedback on holdings. 'We are delighted to confirm that sort of information when we're asked for it,' says Alex Lyle, the director of UK equities at Threadneedle Asset Management, adding that in many cases for UK companies it's simply a matter of clarifying that his institution stands behind a particular nominee name. 'We want to have a freeflow of information with companies and always like to meet management on a regular basis. Being secretive about your shareholding is not going to help that relationship.' Tony Little, head of corporate governance at Gartmore, agrees. 'We do tell companies how much we hold in them – as a matter of courtesy if nothing else,' he says, stressing the two-way street argument: 'There's a degree of self-interest in what we're doing.'
Open to change
Despite the open approach of some, keeping a constant eye on shareholder bases remains a perennial problem for European corporates. One might think that the European-based shareholder identification providers would like to maintain the status quo. Surely a bit of secrecy on the part of fund managers is good for drumming up more business?
That may well be the case as things stand but most look forward to a more open future and have no fear that, if that comes, their businesses will suffer. They point out that shareholder identification services in the US have been able to move onto a new, stronger, strategic level because more holding information is publicly available. 'There will always be room for further analysis,' says Rusling at Kuhn Partners. 'Look at the US. They have more emphasis on analysis whereas in Europe there is still more emphasis on the actual collection [of data].'
John Tudor at Citywatch agrees. 'I don't think more disclosure in Europe will hinder our growth. The market is moving in that direction but moving very slowly. Certainly there are still some very conservative institutions where the door is very shut.' So what's the answer? Many think that legislative action at the European level would make life a lot easier for IR folk. But don't hold your breath. The ongoing, dragged-out discussions over the much-vaunted Takeovers directive don't give much hope for any quick legislation on the shareholder identification front. Indeed, disclosure of holdings has had little coverage in any of the Takeover directive releases to date.
The other option is to apply slow, polite pressure. Recite the quid pro quo arguments at opportune moments. And make it an issue with the media. If fund managers want improved disclosure from companies they have to be prepared to give something back in return.