Advisory Intelligence: European issues, from passives to Mifid II via ESG
With many issues taking shape in 2018, Patrick Hughes, director at Nasdaq IR Solutions, identifies a number of key themes that could be influencing the European investment landscape.
The first is that flows into passive funds are likely to continue their upward trajectory in 2018. ‘The issue of passive investors is a huge topic at the moment in how it affects the landscape and the role of the IRO,’ says Hughes. ‘Our prediction is that flows into passives are likely to continue this year: Vanguard, for example, has already seen about $43 bn in inflows in the first quarter of the year, according to data from Lipper.’
On how this is shaping the market and the issues it touches on, Hughes says: ‘For some companies I meet, they’re up to speed and this is all old news. For others, it is a revolution. Furthermore, board remuneration, succession planning, cyber-security, supply chain issues – these are the types of topics companies are talking about with their passive shareholders, and I think it is a challenge for those that have not dealt with [these areas] before. It adds another layer of complexity and challenge for those IROs.’
Another noteworthy perspective is the changing nature of passives, with passive managers engaging on the governance front. Index fund managers can no longer be thought of as purely passive investors – the focus on control/governance increasingly requires the attention of IR, senior management and the board.
‘Passives are increasingly active from a governance standpoint,’ Hughes confirms. ‘I think many IROs have not fully grasped this. But those who have often had to go through activist situations – or similar – in their IRO role get it now.’
The other big issue is the ESG narrative going mainstream. Data from Reuters shows US investors have poured $4.7 bn into SRI/ESG funds in 2017 – the category’s second-biggest annual inflow ever, with managers pointing to the Trump administration policies as a reason for the move.
‘In Europe, ESG has been around for some time, but it is especially the governance component that is going mainstream,’ says Hughes. ‘State Street data shows around 80 percent of institutions are now incorporating ESG components into their investment strategy. Additionally, from an investment risk-profile approach, it is being used a great deal more.’
An interesting development that is new in 2018 is activists. For example, Jana Partners is launching funds to target companies it thinks can act more socially responsible. This is a space to watch. Another important topic is activism itself, which Hughes says is likely to continue to grow globally in 2018. Recent international high-profile cases in activism include Nestlé, Samsung Electronics, Clariant, AkzoNobel, BHP and Whitbread.
‘I don’t think any companies or markets are immune to an activist building a position,’ says Hughes. ‘Most US and UK companies have an activism plan – and that is really important. In the US, activism is an accepted share class. It should also be noted that not all activists are the same: some are constructive activists.’
Are IROs adapting to this challenge? Because the results, if they do not, can be dire. ‘I think some are,’ says Hughes. ‘We help them and advise them [at Nasdaq IR Solutions] on different ways to prepare, from monitoring shareholder analysis to strategic capital intelligence. Most major IROs are generally doing what they need to do.’
Of course, no current discussion on the European landscape could possibly ignore Mifid II. Without doubt the biggest shake-up to European financial regulation in a decade, Mifid II finally became the norm in January.
‘It is starting to have an impact – at least the IR community is starting to feel it,’ notes Hughes. ‘We are starting to hear that conference attendance is going down; investors have not signed contracts with all brokerage firms. Conferences with thought-provoking topics and unique insights are most likely to do well. The biggest thing so far is IROs dealing with investor requests directly. And that, going forward, is likely to increase.’
Hughes also has an interesting perspective on how some IROs are dealing with developments. ‘Many IR teams are keeping two lists,’ he explains. ‘Some investors are saying, Please let us know when you are here [for a roadshow or event] because we may not be working with your broker. So companies are keeping the morning free [for list one], and then the broker gets the afternoon and group lunch [for list two]. Things are changing.’
And this involves the whole corporate access narrative. ‘Corporate access is an area that is still being figured out,’ notes Hughes. ‘There are definitely some price fluctuations going on around how much the buy side is willing to pay for corporate access. We have heard from our conversations with corporates that one of the things they value from the sell side is the access they can get – but with the buy side less willing to pay, this dynamic is changing.’
Summing up the picture, Hughes concludes: ‘As a result of Mifid II, the continued rise of passive investing and the increase in activism this year is going to be very interesting.’