It is hardly surprising that in the past decade there has been a boom in capital markets intelligence (CMI). More investor relations departments now consider shareowner analysis tools essential to their operations, more vendors offer such tools, and increasingly sophisticated technologies have raised the bar for their efficiency. Yet the techniques used for gathering intelligence vary greatly from one platform to another. Likewise, there is considerable disagreement about the accuracy and usefulness of any given platform. While each market intelligence firm touts its own techniques over that of its competition, the end users – often investor relations officers – have the most to gain or lose.
‘The market has shifted quite considerably in the last ten years, and really over the last few years,’ believes Evan Klein, executive vice president, capital markets intelligence for Thomson Financial, the 800-pound gorilla of market intelligence. ‘This kind of market intelligence was historically a luxury item. Market surveillance was seen as a great thing to have, but not critical to IR programs. Now, more than ever, it is seen as critical. In fact, many IROs admit they can’t effectively do their job without it.’
Klein estimates 80-90 percent of the Fortune 500 use such products, though proportionally fewer small companies use them: ‘In the US, it would be difficult to find a company with over $1 bn market cap that is either not using us or has not heard of us and been called upon by someone in our business.’ Outside the US, the prevalence of CMI drops off considerably. The UK and Canada have the highest usage outside the US, continental Europe has much less, and Latin America less still. ‘Asia hasn’t even begun yet,’ Klein admits.
On a basic level, capital markets intelligence means finding out who owns a stock, who is buying and who is selling. On a more sophisticated level, CMI analyzes cross-ownership between one company’s shareholder base and those of its peers. Peer companies can be those within a defined sector or those that have similar investment characteristics. Companies can select their financial peers within the marketplace – companies with similar revenues, earnings, growth rates, etc – and then run ownership screens against them. The result is a list of primary holders in each stock.
Bringing CMI to a higher level, a company can take its ownership data and build market intelligence by proactively polling the investment community. These perception studies allow companies to find out detailed information about how investors see the company’s management, the competitive environment, the product line, the vision, the changes that might have been taking place in the organization, and so on. Of course this involves clocking a lot of telephone time, and is something few IROs have the capability to handle in-house.
The goals
According to Don Eagon, vice president of global communications and IR for Diebold, these data gathering expeditions have many applications. ‘If we’ve had a rough week on the market and the IR team here can’t pinpoint it to anything, we’ll call in a firm because they have ways of getting in and talking to traders and other people who really know what’s going on,’ he explains. ‘We say to them, here is something we perceive the market to be doing. We’re sitting here doing grandmother surveys and we need real professionals to go in there and make some calls and see what they can find out.’
Eagon also uses CMI to measure the impact of specific communications efforts. ‘We use it more specifically if we have roadshows and we want to monitor their results. We watch the results of a roadshow we’ve done to see if we’re achieving our objectives. We’ll say, all right, we spent two days in Boston, here’s who we saw. Let’s see what they’re doing with our stock.’ Eagon often turns to Citigate Dewe Rogerson, which expanded its CMI operations with the acquisitions of Kissel-Blake’s and CIC’s stockwatch divisions in 2000.
Still another use of CMI is to aid the IR department in its internal communications, says Neal Nemeroff, North American president of Computershare Analytics. ‘Oftentimes the IRO has to do a monthly report for upper management as to what’s going on with their stock. We allow the user to do a comparative ownership report, saying here’s a number of holders, here’s the institutional ownership, and these are the institutions that are active in our peers.’
Of course the ultimate goal of capital markets intelligence is to allow the issuer to find compatible, long-term shareholders – what Rivel Research president Brian Rivel calls premium drivers. This is no small feat, considering the vast number of funds, portfolios and money managers out there. Identifying those ideal shareholders is as much an art as a science; and, ironically, five different CMI products would create five lists of best-match shareholders that are completely different.
Data mining
Much of the information gathered by market intelligence firms comes from regulatory documents of one kind or other. In the US, that’s mainly 13Fs, 13Ds and 13Gs. These documents lag behind real-time holdings by as little as ten days or as much as three months. Another source some vendors use is settlement data gleaned from custodian banks.
Access to such data varies greatly from country to country, however. ‘Continental European companies are uniquely disadvantaged in terms of understanding their institutional ownership due to poor disclosure requirements,’ says Albert Lojko, head of Thomson Financial Corporate Group in Europe. The bearer share system militates against even identifying holders. However, companies in the UK and Ireland enjoy a liberal disclosure policy (under Section 212 of the Companies Act, for example, UK companies can require registered holders to disclose the names of beneficial owners).
Some CMI firms pride themselves on their ability to sleuth out trading information without having to rely too heavily on regulatory agencies or custodian banks. They study the trading of their clients’ stocks day in and day out, and they build knowledge about what goes into the investment process: Who are the major traders, the analysts and the portfolio managers? What are the profiles of those contacts?
‘We look at institutions not necessarily based on what they say in their prospectus – that’s almost irrelevant to us,’ says Klein. ‘We look at the stocks they buy and sell, when they buy and sell them and what the company fundamentals are when they are added to or removed from the portfolio. This quantitative approach allows us to reverse-engineer the investment process the fund uses to manage the portfolio. We essentially get the DNA of that fund. We can use that information over time to predict how they act, think and trade.’
Klein admits that although in some cases he can be 100 percent sure of the parties involved in a transaction, in others he has to resort to educated guesses, which are confirmed or denied through settlement data three days later.
Nemeroff confesses to doing ‘dirty research’, which involves gathering information in roundabout ways. ‘Lots of hedge fund managers don’t want to talk to us or anyone, so we have to do a lot of research on the web.’ Computershare will browse an investment fund’s web site to get names and contact information. ‘We may even do late-shift calling of automatic phone attendants to see who the contacts are, what their extensions are, and if in their messages they release some specifics about what their specialties are,’ says Nemeroff.
Brian Rivel has a different take on fund managers’ willingness to talk: ‘They understand that we’re out there trying to match them up with companies where they can share the CEO’s vision. It benefits their holdings in the long run.’ Rivel compares his firm to a dating service for the investment world: ‘We’ll even call after the first date to get feedback from both sides and find out how it went.’
The drawbacks
According to Brendan Fitzpatrick, vice president of JM Lafferty, ‘The only thing a portfolio manager wants to know is: What can you tell me about why I should buy your stock that is not already cooked into the stock price?’
Fitzpatrick strongly disagrees with the traditional approaches to peer-based targeting. ‘Anyone on my side who should know better and who advocates peer targeting is doing a great disservice to the investor relations community. The reason is that the number one rule of portfolio management is thou shalt diversify.’ Fitzpatrick notes that while some portfolios occasionally become overweight or underweight in one sector, by and large they are diversified, and they’re not going to own one company just because they own its peers.
Fitzpatrick’s rationale: You can go to your Compustat database and find a group of peer companies with investment characteristics similar to yours, then find portfolios that own three or four of those peers. However, when you take this approach, you assume that all portfolio managers care equally about all the criteria you select, and that your thresholds for each are meaningful, not random. In other words, the investor has no input into your model. ‘What if the portfolio manager’s preference for P/E, expected growth, risk, leverage, earnings variability, etc are all more or less consistent with your company, but the portfolio doesn’t own four of your twelve peers? It’s off your list? Seems heavy-handed.’
Fitzpatrick advises companies to look at their own shareholder base and pick out their active owners – those with whom they have regular contact – and identify the number of investment peers those investors own. ‘I can almost guarantee that at the level where the investment decision is made, there is going to be zero or perhaps one peer in the portfolio. Companies cannot explain ownership of themselves based on some peer group they have identified. Therefore, why would they invest time using that investment peer group as a way of finding future owners?’
In other words, if your model doesn’t work for your own shareholder base, if you can’t validate it, if it doesn’t explain current buying behavior, then why should you have any reason to believe it’s going to explain any future buying behavior?
Klein says most shareowner analysis firms have access to more or less the same sources of information, although they use the information in different ways. Thus the five different lists of ‘best targets’ from five different CMI systems. This scenario may leave investor relations officers discouraged about the accuracy of such lists. After all, they can’t all be right.
Or can they? While identifying potential shareholders is a valuable practice, it is not the most important step in attracting new shareholders. Even if IROs could find a single, accurate list of their potential holders, that still wouldn’t guarantee that those investors would purchase the stock. The real challenge isn’t in finding the data, it is in what IROs choose to do with that data.
Sell the message
‘At the end of the day IR is a marketing function,’ asserts Rivel. ‘The stock is the product and the investor is the customer. And just as a company would spend $1 mn to find out how customers would react if it changed an ingredient in its toothpaste, so too should a public company be on top of how the Street would react if it changed something about its fundamentals. At its core, market research is a customer satisfaction study for the public company.’
Nemeroff adds, ‘Every analyst and every firm looks at the value of a stock differently. So you have to know how your client looks at your product – in this case, the stock – and you have to adjust your pitch accordingly.’
Market intelligence is the means, not the end. It comes back to the idea that if you have this information about your company and your peers and what the investment community is looking for, that should help you to tailor your message, underscore certain issues, clarify things that may not be well understood, or do whatever else is needed to influence the investor’s decision about buying and selling your stock.
‘The IR person can call up and say I understand you invest in companies that are expecting x growth and have market cap between x and y; I’m also aware that you’re underweight in this particular industry which is specific to us,’ Nemeroff suggests. ‘That’s the type of content that can bring the conversation full circle for the CFO or IRO. To have an intelligent conversation with that analyst or portfolio manager and talk their specific language, instead of having the same pitch for every person. That’s the end goal.’
