Toronto investment pros weigh good and bad IR
The IROs were from Canada but the rapid-fire discussions ranged around the globe at this first-ever event, hosted Thursday at the new RBC Centre in downtown Toronto.
The event built on the investor perception study behind the recent 14th annual IR Magazine Canada Awards with panels covering the three principal legs of the research: investors and analysts, award-winning IROs, and key challenges in the market.
A panel of two portfolio managers and RBC Capital Markets’ lead analyst for both equity and credit capped the day. Malcolm White, portfolio manager at CI Investments, said one quality that sets apart great IROs is getting division leaders in front of investors. By contrast, at one company that was having a big problem with a division, when White went to the CEO and said he should get the business head on a call, the CEO said investors could wait for the analyst day in eight months. ‘Some IR teams take a black-box approach and they’re the only people we get to talk to. Others are more in-depth,’ White said*.
A frequent question as the market keeps hitting new peaks is whether IROs should take management on non-deal roadshows with sell-side analysts who have negative ratings. For example, according to Jonathan Allen, lead analyst at RBC Capital Markets, one company his firm had downgraded canceled a marketing trip, saying, ‘Why should we do you any favors?’
Allen said that was the wrong perspective. ‘If analysts are already very positive on you, that’s easy,’ he suggested. ‘But if they don’t understand the story, then you should spend more time with them. If the analyst is professional and has an open mind, then maybe it’s just failure of communication. Plus, our ranking on stocks may just reflect valuation or short-term trading views, not a negative view on the company’s management and their opportunities.’
Allen, who heads up RBC’s equity research in Canada, was appointed in 2008 to lead credit research as well. ‘We set out to integrate credit and equity research, which in the past had been very separate,’ he said. ‘It turned out the financial crisis was the perfect time to do it. The crisis showed a lot of equity investors the importance of the balance sheet and the credit side.’ As a result, Allen has increasingly been taking companies to see equity and fixed income investors in the same meeting.
Stuart Kedwell, vice president and senior portfolio manager at RBC Asset Management, said his firm is paying a lot more attention to the drivers of executive compensation. ‘We’re much more concerned about whether there’s a link to return on capital,’ he said. RBC Asset Management been aided in this by a rapid increase in the number of conversations it has directly with boards – up 50 percent in two years, Kedwell estimated: ‘Some of our big holders began asking to engage with us on governance issues like pay. We wondered if maybe the idea came out of IR magazine; it seemed to hit us all at once!’
Online exlusive: Compensation counts here too
In fact, this proxy season executive pay is a bigger concern than ever, said Brad Allen, senior vice president of proxy firm Laurel Hill Advisory Group. Some Canadian companies have adopted say on pay and, said Allen, some of these are nervous – with good reason. ‘Simply put, directors don’t want to be embarrassed. So their big questions are how can they best find out shareholder sentiment in advance of the annual meeting, what are the warnings signals, and how can they can ensure a good vote.’
John Vincic, vice president of investor relations and corporate communications at HudBay Minerals, was on a panel about benchmarking IR performance. He said one of HudBay’s goals for 2011 is broadening the range of executives it uses in IR: ‘My CEO and CFO are key guys from a marketing standpoint. But now we’re bringing more of the management team on the road – our VP of exploration, COO and others. It shows investors our breadth and depth, but it also gives our executives a feel for what IR is all about, why it’s important, and how it ties into shareholder value creation.’
The timing of the seminar was perfect considering the first major cohort of companies has just started reporting under international financial reporting standards (IFRS) since the transition at the beginning of 2011. Going into the seminar, Martin expected IROs to ask a basic but big question: ‘Why are we making the change?’ He also expected to hear that IROs are getting the same question from investors.
‘I’ll be interested in people’s reactions to see if they disagree with this major change,’ Martin said. ‘I also want to hear how IROs are feeling about their preparations for dealing with all the other questions that will come along.’
* Discussions at IR magazine’s think tanks and seminars are generally anonymous and off-the-record. These interviews are from just before the event.