Bellevue manager: Build relationships as sell side shrinks

Apr 04, 2018
Paul Major talks corporate access, paid-for research and IR outsourcing in a post-Mifid world

Three months on from the go-live date of the EU’s mammoth regulation, issuers remain unprepared for Mifid II, according to recent research from Optimum Strategic Communications

Paul Major, portfolio manager at Bellevue Asset Management, which manages the BB Healthcare Trust, discusses some of the findings of the report with IR Magazine as well as differences by cap size in Mifid II’s impact and keeping up to date on sell-side changes.

What should issuers not yet feeling the impact of Mifid II be doing to prepare for the changes ahead?
I think they should be discussing the long-term plans for coverage from the analysts that currently follow them. We have already seen some UK small and mid-cap healthcare companies losing coverage as sell-side firms ‘re-allocate resources.’ This is likely to continue and it is better to be aware of it well in advance. 

I would also consider cultivating relationships with those who do not follow you since (and speaking as a former sell-side analyst) the easier it is to get access to management etc, the more likely you are to take on coverage. If you offer to help as much as possible, it cannot hurt.

I would also think about the corporate access side. Now that corporate access is effectively a paid-for service for the majority of us taking all our costs onto the P&L, many firms are in effect limiting roadshow and conference invites to higher tiers from their lists, so IROs may find that the quality and depth of any roadshows organized by the sell side have declined. 

If this is the case, then you need to be proactive in organizing trips yourself and maybe consider working with independent IR consultants who are retained and paid for directly, rather than relying solely on the sell side. It is not unreasonable I think to ask for a list of who is ‘covered’ for company meetings when considering a roadshow with a specific sell-side firm.

How should Mifid preparedness differ (if at all) by cap size?
The best execution rules around trading that have come in with Mifid II to some extent place the onus on the buy-side client to justify why they chose a particular party to implement a trade. The impact (ie efficiency of price realized) can only be known in hindsight and most of the banks have good software packages to ensure they do a good job. 

On busy days like results or corporate actions or when markets are volatile, other factors may come into play and it could well be that a bank is chosen because they have a good ‘feel’ for what is going on with a corporate action. This of course comes from the analyst.

So, in a long-winded way, I am saying that big, liquid companies will attract good coverage because the market share available on the secondary trading will pay in large part for the analyst’s time. Thus, I believe Mifid II will have a minimal impact on larger companies.

One of the comments in the Optimum report speculates that the impact on research could be worse for mid-caps than small-cap companies? What are your thoughts on this?
I think this depends on what sort of a company you are. If you are small and fast growing, with a need for additional capital, the potential fee opportunity around the future capital raising may be enough to justify coverage as the banking fees have a lower limit. 

If you are small but sufficiently mature to not require further external capital, then I would think you may struggle a bit more. 

This will also vary by area. If you are in a white-hot space in tech or cutting-edge medical research, you may find that you get coverage as a ‘key competitor/disrupter’ of an interesting industry or area. Conversely, if you are in a more commoditized marketplace where your business has limited potential to disrupt larger established players, then again I think you might struggle.

How do you currently feel about paid-for equity research? And if you view it negatively, do you expect to be more sympathetic toward companies choosing this option in the future?
Paid-for research is an interesting idea. The quality varies somewhat but it can be good and we have used it ourselves as a source of information. I think it will have to grow; the question is how you can make it seem less conflicted.

I like the Stage program offered by the Swiss Stock Exchange, where it allocates research and pays the brokers from a fund so that the corporate is not directly paying. This provides a degree of quasi independence and probably helps the brokers involved build their business in this area as they know the stock exchange will guarantee them a certain level of annual income.

Finally, Optimum’s research shows that investors are expecting corporate access to at least stay at the same level, if not increase, despite the expected shrinkage of the sell side. What advice would you offer companies on satisfying the meeting demands of the buy side?
I do not believe that corporate access will stay at the same level. Indeed, I think it is already changing and you are seeing people move from the sell side to independent IR or corporate access firms, which I expect to proliferate. 

We anticipated that the level of access would change and put a strategy in place that is working well for us as a firm to ensure that we get the access we need. 

However, I think that a regular dialogue with the corporate access teams of sell-side firms is a good idea, to see how things are evolving. What banks and brokers might suggest in their pitch books and the reality on the ground are not always the same thing!

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