The buy-side view of Mifid II
When you gather three members of the buy side at an IR conference, the conversation is inevitably going to turn to Mifid II. Chris Hollis, chairman of Cliff and head of financial communications at luxury goods giant LVMH, talked regulation with Kirsty Collins, global responsible investment at Aviva Investors, Nicholas Melhuish, head of global equities at Amundi, and Marc St John Webb, partner and fund manager at Quaero Capital at the Global Forum in Paris. Also on the table was ESG, access to the board and even some pet peeves about IROs (coming soon).
Chris Hollis: We heard [in a previous panel] how Mifid II is going to impact the IR role. What can we as IROs do to ensure we get in front of investors at the right time?
Nicholas Melhuish: The dreaded M word. I think this is the probably the biggest thing that has happened in our industry and I’ve been doing this for 28 years. Along with the internet, this is incredibly important and it’s going to have a huge impact on everyone in IR.
It’s really going to reshape the way the industry works. People seem to be very sad about Mifid II but, I have to say, I’m rather excited about it in some ways. I think it’s a great opportunity for companies to engage directly with their shareholders. I think it’s also very important to us as institutions because it’s going to remind us what we’re actually doing. I think the distance we have from the companies we invest in – and I think this is particularly true in the large-cap world – is sometimes very unhelpful.
There are a lot of technical challenges and a lot of financial challenges and the big issue here is that it’s a bit like Brexit: who is going to pay [for it] is the principal problem. Once we get through that, though, I think it’s going to be a much more satisfactory existence for companies that hold this challenge well and [an opportunity] for investors to embrace to really understand the companies they invest in, to interact with them and to think as long-term shareholders.
CH: [Marc], you deal primarily with small-cap companies. How do you think Mifid II will impact small caps and your role? And what can the people within smaller-cap companies do to improve their relationship with you?
Marc St John Webb: Our relationship in terms of smaller companies and meetings was disintermediated quite a long time ago [and] we have a privileged relationship with companies directly – with the IROs or the CFO or CEO. From the corporate access perspective that will continue, [though] there will be a lot of changes in terms of conferences and roadshows and there’s still a lot of confusion on the sell side about how it’s going to offer us a service.
We think what may happen on January 3, 2018 is that we might take the risk to drop research payments to half of our brokers – which is enormous. There will be lots of changes and we’ll probably be in a better situation to discuss what has happened and where it’s going in a year’s time, but clearly there’s a lot confusion at the moment.
In terms of what IROs can do ahead of Mifid… what we value very much from companies is that they explain to us their corporate dynamics – where they make profits – and be transparent. I think if a company finds itself orphaned because it has no broker coverage, it just gives greater importance to the communication [coming] directly from the IRO when [the firm] publishes its figures.
CH: With presumably less research, especially for smaller companies, consensus might be made up of two or three numbers, which could be somewhat different. What are the implications of that?
MW: No change for us. A consensus in small or micro-cap companies is already one, two or three brokers – there’s a big disparity.
NM: I think it could make a difference for large and mid-sized companies but probably not that much. The idea of a company having 25 analysts and being worried if that went down to 15… I think if you compared the client list you’d probably find you were hitting most of the major people with 15 and probably actually with a much smaller number than that.
And as far as consensus is concerned, it’s normally quite tight in mid and large caps and that comes down to this concept of guidance, which has come across the Atlantic from the US. It was quite alien in Europe 15 or 20 years ago and now it’s become more common. I’m not actually sure how helpful it is, though, because it focuses the investor’s attention on the next quarter and I think we, as shareholders, need to be thinking in a much longer-term way than that.
That is one of the unfortunate offshoots of information intensity: maybe too much research, too many analysts, too much reliance on guidance, which I think has generally been unhelpful to our industry. This could be another silver lining to Mifid, where we move back to something that came before, where people really had to do the research and were thinking about investing in companies for [something] more than whether they were going to beat the next quarter by one or two cents, which I think is a pretty pointless strategy.
CH: [What about] the increasing use of passive funds? We’ve seen this in particular in the US [and] it’s becoming more important here given Mifid II and that it costs very little to buy and sell. How is that going to impact on the investment community?
NM: It is going to impact in two ways. First, it’s very important for everyone in [IR] to engage with the governance teams at large exchange-traded fund platforms because otherwise there’s going to be a complete vacuum in the governance process and that’s going to be bad for financial markets and, I think, bad generally.
It’s important that you interact with them and, if necessary, encourage them to be active if they’re not, because that two-way process between shareholder and company is very important. Ultimately shareholders are the provider of risk capital and they need to be fully engaged on governance whether they are active or passive but it is more difficult for passive investors because the way they make their choices is different.
That’s one challenge for IROs: you need to make sure you reach out to passive investors as well as active investors as far as governance discussions are concerned.
The second thing… is that there is a race to the bottom in terms of fees and this is why there’s a big fight [around] who is going to pay for corporate access – because the buy side, profitable though it is, will be feeling under pressure from a profit perspective because of all these regulatory concerns at a time when fees are really shrinking.
We’re going to have to be a lot more selective in the way we approach research and how we allocate resources to the process of interacting with companies. Maybe this is going to have an impact on the way active funds are constructed, for example. The days of active funds with 150 companies in them are probably over – for all sorts of reasons. One reason is going to be how on earth are you going to have the resources, without the sell side, to analyze all of those companies and be able to interact with them when you’re going to have to pay part of the cost for corporate access?
In the UK, the Financial Conduct Authority (FCA) has been very clear on this. Since 2014, corporate access is not part of research; it may not be paid for out of client money. The FCA hasn’t enforced that rule so there’s a big gray area at the moment and people are still continuing as if this hasn’t happened – but once we get to January, I think we all need to err on the side of caution.
The other side of that for IROs is that you’re either going to have to hire a lot more people into IR departments and bear some of those costs and/or you’re going to have to be more selective in the way you engage with investors. You’re going to have to work out who is most relevant to you – and that’s not necessarily your top 10. It should probably include your top 10 but you’re also going to have to find a way to work out who you should be targeting.
This is why I say this is going to be a period of profound change for the industry because all of these forces are going to be coming together.