Fewer active managers does not mean less influence for IR teams
When Burton Malkiel published A random walk down Wall Street more than 40 years ago, passive investing was a minor niche in the investing landscape and actively managed mutual funds were on the rise. In those pre-email, pre-spreadsheet, pre-conference call days, IROs read their companies’ earnings releases over the phone to each analyst, one call at a time. Carefully written analyst reports would then be printed and mailed out to clients. The entire process could take several days before the market could fully absorb a company’s quarterly results.
A lot has changed. Malkiel’s book popularized index investing among the general public and, over time, passive investing has become a dominant force in the market globally. Algorithm-driven investors seek a microsecond advantage as new information spreads simultaneously to every corner of the market. And IR has evolved from a labor-intensive communications function into a strategic role at many firms, aided by a bagful of technology tools.
At the same time, however, the market’s appetite for fundamental research in which the IRO is the critical linchpin seems on the wane. Morningstar research reports that the top 25 US funds by assets are now either passive index mutual funds, exchange-traded funds (ETFs) or fixed-income funds. The multi-year trend of funds flowing from active managers to passive vehicles accelerated last year with nearly $100 bn leaving actively managed funds and more than $160 bn flowing into passive funds. Add to that the proliferation of robo-adviser tools used to recommend and automatically rebalance asset allocation among different passive funds and ETFs, and the conclusion is obvious: the shift to passive investing is likely to continue.
But if the tide of investor capital is shifting inexorably toward IR-immune indexes, ETFs and algorithm strategies, what’s the future of IR? It’s not a new question, but it is now more urgent than ever. Market fundamentals ensure IR will always be needed, but to effectively function in this evolving environment as an IRO, you’ll have to educate yourself on the new market landscape. The labor-intensive part never goes away, and current trends promise to keep IROs busy. Rising shareholder activism in both the US and Europe, increasing M&A activity, restructurings and spin-offs all require a well-informed, trusted and skillful IRO to orchestrate the company’s communications with investors.
But I believe this growing passive world enhances the value of IR in three areas: helping management and boards hear through the noise of meaningless trading volume to understand what and who is really important, identifying and engaging with the active investors that will never go away, and optimizing exposure to the passive side so the indices and baskets that should hold your firm’s ticker in fact do.
In this context, BlackRock CEO Larry Fink’s call for companies to step up their communication with investors deserves attention. Fink, in well-publicized letters to many of his portfolio companies, calls on CEOs to ignore investor pressure for short-term results and focus on long-term sustainable returns while engaging with major shareholders and clearly communicating long-term strategies. He also calls on boards to implement shareholder-friendly governance policies.
It all sounds like a job description ready-made for IROs who understand their company, its industry and shareholders, and who can both spearhead the communication of strategy and facilitate a dialogue with its long-term active investors.
Business and financial journalist Brad Allen is a former IRO and served as NIRI national board chair between 1996 and 1997
This article appeared in the fall 2015 print issue of IR Magazine