‘It’s not an issue of PR people keeping analysts and fund managers up to speed on their jobs, they do it themselves,’ exclaims Dr Jane Fiskin, director of global private equity at Dresdner Kleinwort Benson.
Fiskin, who has some ten years of experience as an analyst behind her, initially with large-cap pharmaceutical companies and most recently in the biotechnology sector, is quite evidently outraged by the suggestion that the investment community might be in need of a bit of a helping hand.
However, according to a number of investor relations officers, the high employment turnover in the investment community is making the very function of investor relations increasingly difficult to fulfil.
Helene Gunnarson, manager of investor relations officer at Sandvik in Sweden, says that her company is getting around the turnover issue by starting formal education classes for new analysts. ‘We had about five to ten new analysts starting at the same time,’ she explains. ‘And that gave us the impetus to put together a program that would provide them with a quick start on the company. It seemed very important for us to get not only volume but quality in terms of the sell-side research following the company.’
According to Gunnarson this involved bringing the analysts to Sandvik’s headquarters for a full day of presentations from the company’s various business area presidents. The training took place in September.
‘It was a really successful day,’ Gunnarson enthuses. ‘I think we managed to give them a lot of information as well as to develop a dialogue between the analysts and senior management. With this foundation the new analysts can start building a more in-depth relationship with the business.’
According to Gunnarson, another meeting will be held in February and, whereas only Swedish analysts attended the first meeting, she will be inviting the company’s London-based following next time round. ‘About half of our analysts are based in London so it would be good for us to get them over here.’
For the February meeting Gunnarson expects to extend the training sessions to one-and-a-half days and to include plant tours and site visits in the program. ‘We’ll try and really take full advantage of having them over here to show them around,’ she adds. The training is not just for new analysts either. If established analysts want to send some of their more junior people along that’s fine too. ‘We want to give everyone a feeling for what’s behind the numbers, to give them a real insight into who we are and how we run the company.’
Down under
On the other side of the world, though, site visits for analysts can take as long as a week. According to David Skinner, manager of investor relations at the Melbourne office of metals and mining giant Rio Tinto, you need that amount of time to get from one plant to another. ‘We want to take analysts to visit sites which are sometimes in very remote places. We accept that it’s a big commitment of time, especially for the buy-side, but in our experience it’s essential to take people around to really see the business in operation, particularly if they’re new to it.’
Skinner says that such visits take place on at least an annual basis with various smaller host visits at set times during the year. And, he says, attendance is generally good. ‘Going on site visits is a great way to build up knowledge of the company and to really gain trust in the sort of operations we are running. I think analysts accept that.’ Again, the site tours are not just for new analysts. Many attend year after year.
For analysts who are completely new to Rio Tinto, the site visits are the third step of an introductory investor relations program. First of all Skinner offers analysts a suite of materials on the company to study in their own time. ‘Once they start asking questions, we invite them in to come and see us. Then we offer site visits which aim to help build on their knowledge of the industry with more specific details about our company,’ says Skinner.
Pasminco, another Melbourne-based mining company, has a similar approach to new analysts. ‘If an analyst is just starting out we’ll definitely get them in here and talk through the issues with them,’ says group manager of investor relations, Trevor Shard.
Twice a year Pasminco also runs site visits: ‘They provide new analysts with the ability to see and feel the nature of our operations.’ As at Rio Tinto, these can take up to a week and Shard admits that it is difficult to get non-domestic analysts to attend. ‘The time commitment is generally too much so we tend to rely on our web site and the general information flow to keep them informed. We do of course make available all the presentations from the site visits but they don’t get the same kind of one-on-one contact,’ he adds.
Musical chairs
But if all this time and effort is invested in a new analyst, what happens when he or she eventually moves on? Shard says that the turnover in the analyst community is just something that goes with the territory. ‘You’ve got to accept that the education process is ongoing.’ He adds that although people might switch brokerage houses on a regular basis, it’s rare for anyone to completely change industry. ‘You see a bit of musical chairs going on with people moving around between different firms. But, from our point of view, that’s okay. Because as long as they stay within the industry, then they’re taking their knowledge of our company with them.’
Skinner agrees with this, adding that generally the analysts covering Rio Tinto have a high degree of knowledge of the industry. ‘You’ve got a lot of analysts in the resources industry with resources backgrounds and so an in-depth understanding of the area. That’s an advantage because it means it usually doesn’t take long to get them up to speed on your specific company. It’s very rare to get an analyst who isn’t building on knowledge they already have of the industry.’
Canadian media-empire Thomson Corporation has found less of a knowledge base among its analysts. According to head of investor relations John Kechejian, the company’s analyst education process needs to work well on two levels. ‘As well as raising the investment community’s overall understanding of our company, we need to educate the analysts about the industry.’ He explains: ‘Many of our main competitors – like Reed Elsevier or Wolter Kluwers – are only listed in Europe so the Canadian analysts and institutions simply don’t follow them. That’s a disadvantage in terms of their understanding of the industry and we have got to fill the gap.’
Kechejian’s latest education initiative is a series of market group meetings. Hosted on a bi-monthly basis, these involve the chief executives of each of the company’s market sectors making presentations to small groups of analysts about the company’s strategy and development. Introduced for the first time this year, Kechejian says that they will definitely remain part of the company’s investor relations strategy going forward. ‘Our job is to establish credibility both for ourselves and the company and these kind of meetings provide a great opportunity to do just that.’
Good grasp
According to Mark Lynch, European food analyst at Warburg Dillon Read in London, UK analysts generally have a good grasp of the industries they are covering. ‘Most analysts at least know the sector that they’re following well and most probably the specific companies within it.’
Lynch believes the level of turnover in the investment community has been overplayed. He points to the 1999 Reuters Survey of UK companies that found that 30 percent of those surveyed had been analysts for three years or less. ‘That means that 70 percent have been around for more than three years, many for a good deal longer,’ explains Lynch.
The same survey also found that over 90 percent of respondents had worked for three firms or less, with well over 30 percent of respondents having only worked for just one firm. ‘The reality,’ argues Lynch, ‘is that you’ll find a core of people who know the companies very well, often better than the investor relations people themselves. In some cases you’ll find that the analysts have been following the companies longer than their finance directors [have been there].’
Lynch says that the problem is often not getting enough in-depth information from the investor relations people. ‘The difficulty is that analyst education needs to be geared toward different constituencies. On the one hand you’ve got those without much knowledge of the companies. On the other, you need to speak to people who have an incredibly in-depth knowledge. The challenge is providing the right level of information to each constituency, something that most companies don’t necessarily get right.’
Dr Jane Fiskin at Dresdner Kleinwort Benson agrees. She suggests that, particularly in the case of smaller companies, analysts need substantially more contact with senior management than they are getting. ‘When there are hundreds of analysts following your company it’s fair enough for the investor relations officers to get really involved; management can’t cater to all of them. But for a company with a market cap of less than £50 mn it’s a nonsense,’ according to Fiskin. ‘Anyone who is serious about their job will want to build up some kind of relationship with senior management. And smaller companies should be able to offer that kind of contact,’ maintains Fiskin. She suggests that web sites can provide the basic information that analysts will need, with a mixture of presentations and one-on-ones offering them the more in-depth material. But, again, ‘in terms of getting anything decent,’ they will want to meet with senior management.
Putting theory into practice
Kirsty Macmaster, managing director of London-based agency Macmaster & Company, suggests that the whole concept of educating analysts needs to be re-thought.
‘Of course it is part of the theory of good investor relations but companies have to ask themselves, In practice is it really useful?’ Macmaster thinks that generally the answer is no. She says that, certainly in the UK, analysts are spending less and less time on doing research.
Part of the reason for this is simply parochialism. ‘Analysts just don’t care about being educated about companies anymore,’ she asserts, explaining that many brokerage houses – some of which have gone through painful mergers in recent years – are themselves under financial constraints. ‘They’ve got to justify whether it’s worth spending the time researching companies because the research has got to drive business from the institutions. That’s the only reason to have research anymore and that means that their focus is simply on getting their forecasts right.’
Macmaster suggests that the situation is reaching near crisis point in the UK. ‘Active managers are under increasing pressure to do well, they have to assess the payback on everything they do.’ This means for some analysts it is no longer worth their while following the smaller companies. Macmaster suggests further that analysts are also avoiding large companies that have experienced some recent difficulties. ‘We’re finding that companies that are out of favor are going to stay out of favor for some time.’
Warburg Dillon Read’s Mark Lynch accepts Macmaster’s and others’ observation about the increasing neglect of smaller companies. ‘It is inevitable,’ he comments. ‘With the expansion of analysts’ universes to outside of the UK, you are seeing increasing demands on them, time-wise. There are only so many hours in the day. If you think it will take just as long a time to cover a large multinational company as it will a small company, then you’re going to go for the larger company because it makes sense financially.’ Firms like Warburgs get around the problem by having dedicated small company teams but for other brokers without the same kind of resources it’s much more difficult. Adds Lynch: ‘You will see them cutting smaller companies out of their remit to a certain extent.’
Macmaster suggests that, with this in mind, smaller companies in particular need to think very seriously before they start investing in lavish education programs. ‘The concept of general education is a good idea but it’s not realistic,’ she cautions. ‘If you’re going to organize a site visit or a presentation it has got to be for a specific reason. You have got to provide analysts with a story. That’s the only way that you’ll make the program pay.’
