Sell-side research and the IRO
Much has been said about the upcoming Mifid II reforms and how asset managers will no longer be getting sell-side research free of charge, among other things. But what are the consequences for IROs who have been used to receiving and reading reports from the analysts covering them?
Lyndsay Wright, director of strategy, brand and IR at UK betting firm William Hill, ‘always’ reads sell-side reports on her company. ‘It’s key to understanding the messages in the market, to address any misconceptions and to respond to questions from the buy side. We also track what is being said about peers and the wider industry,’ she says, highlighting the importance of context.
‘Of course, I read all the research reports on our company,’ echoes Veronique Boca, director of IR and communications at Mersen, a French mid-cap specializing in electrical power and advanced materials. ‘I use them mainly for peer group analysis, but also for business competitive analysis.’
Boca reveals she has gone down the road of paid-for research, having recently convinced her CEO and CFO to do so to expand their shareholder base. ‘Given our size, French brokers covering our company weren’t interested in taking us to the US,’ she explains. ‘We decided to work with a local provider of research, which took us on a series of roadshows.’
But Boca isn’t that convinced about the concept. ‘Will the fund managers ever consider those reports as independent, since Mersen has paid for them?’ she questions.
Asked whether she has ever considered paid-for research, Wright recognizes her firm’s ‘helpful position of having broad and diverse coverage currently.’ But she remains open to alternatives ‘if that were to change significantly.’ After Mifid II, she expects to continue to engage with the sell side as before, she says: ‘It may just be a different size and shape of sell side!’
What about industry reports? ‘Reports on the mid-cap capital goods sector, which is very large, are quite limited,’ Boca says. She believes the quality of research on small and mid-caps has been deteriorating, and is bound to continue to do so with the new regulation kicking in, as brokers focus their coverage on larger, more liquid shares.
‘Research on Mersen has been relatively good quality for the past year, but I believe this is due to our company story more than anything else,’ Boca says. Like many other IROs, she foresees her daily job will in future include much more direct contact with the buy side.
Dirk Winkels, senior director of IR at Rheinmetall, a German automotive and defense group, uses competitor and sector reports during M&A activity and in preparation for his firm’s capital markets day. ‘Our own research is provided directly from the analyst covering us,’ he says. ‘We’re under the assumption that our current provider will continue to send us third-party research after Mifid II.’
Although Winkels has never considered paid-for alternatives, many new service providers have been reaching out to offer independent reports, betting on the shrinking of sell-side research. ‘We’re getting a lot of emails to sign up for research databases right now,’ he reveals.
Indeed, in the wake of plummeting trading commissions and an upsurge in passive investing, some sell-siders have decided to break free from the broker-dealer business model. This is the case of John Zolidis, a US retail analyst, who recently relocated from New York to Paris to found QuoVadis Capital, an independent research boutique.
‘My product – specialized research on the retail and restaurant sectors – is offered to institutional asset managers on a subscription basis,’ Zolidis explains. ‘In addition, we provide industry research or can produce company-specific work on a per-project basis for management teams in the industries we follow.’
Other newcomers, such as AlphaSense, offer an aggregator and search engine for research reports – from both the sell side and independent analysts – and financial news. The platform, which was initially dedicated to investors, has found a new market among issuers, as head of corporate sales and services John Blaine told IR Magazine at the Global Forum held in Paris in early October.
This happened after a CFO from a major pharmaceutical company was intrigued by an analyst tapping away at his laptop, researching on the AlphaSense platform during an investor conference Q&A. ‘In each instance, the analyst asked very in-depth questions complete with details on financials, as well as peer analysis,’ Blaine says.
‘IROs are the nexus of information and intelligence at their firm. Their role, often part of the C-suite, is vital to providing key internal decision-makers with market-moving insight regarding their own stock, peers, industry and broader market trends. At the same time, IROs must be able to communicate with analysts and investors at an expert level on all topics pertaining to the company and market.
‘As the flow of information has increased and the demands to respond to the market are a constant, IROs need to be on a level playing field with market participants. Responding to inquiries, researching developments, preparing for conferences, earnings calls and annual meetings: all require access to information and – more importantly – insight to both understand and provide perspective.’