Tales from Toronto: Mifid II and ETFs
Attendees at the IR Magazine Forum – Canada 2018 hoping for a stunning view from the upper reaches of TD Tower were, alas, greeted with a white-out. But the packed agenda of the forum was enough to warm their minds, serving as the perfect primer for the IR Magazine Awards – Canada 2018 that followed later in the day. Here, we discuss some of the key highlights of the forum.
‘In a Mifid II world, investor relations is more important’
The EU’s Mifid II had been in force for merely a month when the forum took place, but the build-up had been so intense that the regulation emerged as a regular talking point during the day. At previous IR Magazine events in Canada over the last year, there had been a wait-and-see mentality, with attendees pointing to the fact that Mifid II is a European rule change affecting the sell side, so there was no need to dramatically change corporate behavior.
But one buy-side panelist called on the audience in Toronto to seize Mifid II as an opportunity to engage directly with the buy side. ‘In a Mifid II world, IR is more important,’ he said. ‘Reach out to shareholders and arrange meetings.’
An IR adviser on another panel agreed, suggesting that issuers should think about corporate access as a two-pronged effort: working with brokers and going direct. The adviser said this requires a management team that is both ready and willing to get in front of investors regularly, and reliable targeting and surveillance tools for the IR team to use. ‘Be proactive, pre-emptive and strategic,’ she said.
Paul Butcher, vice president of investor relations at CN, pointed out that IR teams should be routinely assessing whether their corporate access is working for them. Although not talking specifically about the effect of Mifid II, he noted how during the past year CN had decreased the number of conferences it attended and increased the number of non-deal roadshows it participated in.
A change to corporate access is one of the anticipated effects of Mifid II, but the change to the way research is produced is at the heart of the directive. As a result, it has often been said that small-cap companies are the most likely to be affected, due to decreased sell-side coverage. One panelist said this is already proving to be the case in North America. ‘How do you separate good research from garbage?’ he asked. ‘That’s hard for IROs. We’re seeing some really good companies working through this and paying for the research.’
But one attendee cautioned others not to go overboard about the extent to which Mifid II will be felt in Canada, pointing to the tight-knit nature of the Canadian investment community. ‘The sell side has died three times during my 20-year career,’ she said jokingly. ‘Mifid II will make the sell side much stronger and better.’
What the Street wants
During the ever-popular ‘What the Street says’ session, panelists highlighted what they see as best practice IR, and called out some IR pitfalls. As a continuation of the discussion earlier in the day, one buy-side panelist encouraged more direct engagement. ‘Be proactive. Reach out to us,’ he said, adding that, at the very least, IR should ‘respond to emails’.
A sell-side panelist talked about how important investor days are to ‘showcase the bench strength of your executive team.’ Another panelist agreed and said site visits are an even better opportunity to get to know management team members, as well as meeting other employees.
One of the buy-side panelists called on IR professionals to be guardians of long-term value creation and not allow themselves to become too focused on short-termism when producing quarterly reports. ‘Never read too much into a quarterly result because a short-term focus exacerbates volatility,’ he said. A sell-side panelist agreed, saying IR’s job is ‘to keep an even keel’.
Finally, when talking about what would deter him from investing in a company, one member of the buy side said the ‘biggest barriers are dishonest management, insider trading and companies that have been very acquisitive.’ The best investor relations professionals have the ability to influence all three of these factors, and should therefore be coaching management to be aware of these concerns, he added.
How to interact with ETFs
Global exchange-traded fund (ETF) assets surpassed $5 tn earlier this year, according to a report in the Financial Times. That set the tone for an engaging panel on what IR professionals need to know about ETFs and how they can interact with ETF managers.
What came across during this session was how fundamental the sell side is to issuers getting to grips with how ETFs work. One ETF manager said the best thing IR teams can do to better understand the behavior of ETFs is to understand the rules of inclusion for indexes. ‘By doing that you understand what’s causing the next rebalancing and can better brief management,’ he said.
Another panelist, also an ETF manager, agreed: ‘Lean on the sell side. It knows the rules as well as we do. We’re given the rules by which the indexes operate, and the sell side stays up to date on that, too.’
Also on the panel was an IRO whose company had experienced its stock being sold as a result of a rebalancing. She asked the panelists whether they would be open to outreach from IROs after a rebalancing to better understand why it had happened. Both ETF managers agreed IROs would be better served asking that question via the sell side, because of analysts’ connections.
The panelists further encouraged the audience to get up to speed on smart beta ETFs, which they said are growing rapidly. ‘If an active ETF sits on one side and a passive ETF sits on the other side, smart beta ETFs sit in the middle,’ one panelist explained.
Based on the discussion, it seemed unlikely ESG would become a material factor for ETF activity anytime in the near future. Although one of the panelists did say that ‘ESG is something the ETF world would love to crack’, he also pointed out that it is difficult to build a trading model around it because there is little uniformity from issuers on ESG disclosure.
This article originally appeared in the Summer 2018 issue of IR Magazine.