Asset management has undergone a transformation due, in part, to the proliferation of data and technology tools, as well as the rapid rise of passive investing vehicles.
Prior articles in this series have highlighted active/passive market dynamics and the technologies that have empowered both active and passive managers. As these articles emphasized, increasingly complex active/passive market dynamics and the proliferation of technology tools make it harder than ever for IROs to be certain they are on the same page as investors. Investors have become increasingly reliant on technology tools for everything from factor analysis to portfolio construction and even natural language processing (NLP).
For IROs to keep pace with accelerating buy-side tech adoption, a new generation of technology tools must be used to empower IROs and ensure they are on equal footing with their buy-side counterparts.
IROs face challenges
The life of an IRO has, perhaps, never been more difficult than it is today. This stems from the fact that shifting buy-side dynamics and regulations have drained research resources, so most companies have fewer sell-side analysts than ever before. Add in the complexity of deciphering what both quant funds and passive investors are doing, and it is extremely difficult to explain stock price movements to the management team and the board. As a result, IROs now face two broad categories of problems:
- The CEO storms into your office wanting to know why the stock fell out of bed this morning and you, as the IRO, need to provide a thorough and thoughtful answer
- Your investors are increasingly demanding of your time because sell-side research on your stock is thin or non-existent.
Addressing these problems in turn, we find your CEO’s question nearly impossible to answer without the correct data and technology tools. In particular, you will need a deep understanding of the specific factors driving investors to invest in, or divest from, your stock. This means not only understanding the KPIs that drive price action in your market segment, but also understanding the unique factors driving specific types of investors (growth, value, momentum, and so on) to invest in your company.
Buy-side investors use numerous tools for this type of analysis; the very best platforms provide specific factor attribution and peer group analysis so that IROs can see what factors drive investors and thus price action. These platforms also allow you to see what company characteristics your investors value and thus who those investors view as your peers from an investment standpoint, rather than competition.
A savvy IRO might look at all of that data and also want to know how bots are analyzing corporate communications to see if NLP tools have flagged particular language as positive/negative. NLP-driven analysis has been used increasingly as not only a quant trading signal, but also a workflow enhancement tool for fundamental and quantamental investors. Accordingly, thorough IROs should track not only what these bots are saying after a communication is publicly available, but also use these tools to vet language ahead of time to ensure new communications are unlikely to elicit a negative market response.
A data platform may allow you to explore factor drivers and an NLP system may interpret language, but these are not just tools to answer questions – these are workflow enhancement tools as well. A strong data platform that identifies specific factors can streamline communication between IROs and investors by ensuring they are talking about precisely the same investment signal.
Moreover, a good NLP system can help IROs be proactive rather than reactive by empowering them to engage in streamlined analysis of the questions being asked of competitors and peers on their earnings calls. Well-designed NLP systems can also identify specific topics mentioned on those calls that drove price action. This type of preparation, combined with quantitative data on specific factors related to your company, can make it easier for IROs to craft consistent communications that will be well received by investors. Essentially, these tools increase both IRO efficiency and effectiveness.
The expanding role of the IRO
As may be obvious from the observations above, I am not, nor have I ever been, an IRO. I am a technologist who has spent the bulk of my career building technology tools for buy-side clients. Shortly before selling my company last year, I attended a NIRI conference that opened my eyes to the challenges faced by the IR community. The combination of increasing complexity of buy-side strategies and the technology used to develop those strategies would pose a monumental challenge on their own, but the IR community is also facing a rapid decline in the coverage and quality of sell-side research. In essence, IROs have lost their sell-side translators while simultaneously being outflanked by the use of technology on the buy side.
This problem prompted me to begin working with the team at Arbor Advisory Group to better understand and diagnose these challenges so we can prescribe technology solutions that help the IR community and ensure markets operate efficiently. In the work we have done this year, it has become apparent to me that, as is the case with most other domains, technology is nowhere near replacing the role played by people. But technology tools can and should be used by IROs to streamline their workflow, enhance communication, improve understanding of their own company and peers and, perhaps most importantly, to enhance the role of the IRO internally within most corporations. These tools and technologies can empower IROs not only to perform their job more effectively and more efficiently, but also assist in crucial corporate initiatives, such as competitive intelligence.
In short, it is time for IROs to think beyond the strategies of the past and get technical. New technologies have streamlined virtually every aspect of modern life and the IR role should be at the forefront of that tech adoption. Used properly, these tools can ensure IROs and investors are speaking the same language. This fluency will make the IR function more valuable than ever.
This article is the fourth in a series intended to explain the shifting landscape of active and passive asset management by highlighting the tools and technology used by investors. Click here to view the first article, which explores active and passive dynamics. Click here for the second article, which explains the technology and data tools used by active managers. Click here for the third article, which explains the technology and data tools used by passive managers.
Evan Schnidman is founder of EAS Innovation Consulting