Corporate access: a few years back the term would have conjured up images of photo IDs, key cards and VPN fobs. Today, it is an industry, a subject of regulators scrutiny and journalists’ inquiries. As the sell side turned corporate access into a revenue and profit center, it became a dominant force driving your calendar requests and a challenge to managing your CEO’s and CFO’s exposure to investors. It has further become a force to be harnessed by savvy IROs.
So let’s consider the world we live in, where turnover of most institutional investor funds now stands above 100 percent and algorithmic and high-frequency trading (HFT) account for more than half the daily volume in major equity markets around the globe. The Wall Street Journal reported that the 20 largest exchange-traded funds (ETFs) in 2014 averaged a turnover rate of 1,244 percent. That translates into an average holding period of 29 days.
But the short-term obsession of many creates opportunities for some, and IROs with a little perspective can navigate through the corporate access rapids without tipping the canoe. A Wharton School study published in 2004 finds that 31 percent of institutional investors studied over the previous 20 years were ‘transient investors’ taking relatively small positions in a large number of stocks and holding them for the shortest periods of time. The study’s author describes this group as having ‘short investment horizons and likely… little incentive to understand drivers of long-run value.’
Another 61 percent were ‘quasi-indexers’ taking small positions across a large number of stocks, and holding them for a relatively long time. The smallest group – ‘dedicated investors’ – making up only 8 percent of institutional investors, took large stakes in a relatively small number of companies, and held them the longest, more than two years on average. In the dozen years since this study was published, HFT and algorithmic trading have grown to where they drive as much as 75 percent of volume, and ETFs have similarly grown in impact, making the dedicated investor an even rarer species in today’s market.
While most IROs seek out dedicated investors, the research reveals how IR activity can sometimes work at cross-purposes: ‘We find that transient institutions focus specifically on IR activities and interim reports, which help companies maintain continuously high liquidity… IR activities such as conference calls and management forecasts provide transient investors with ‘information events’ that present opportunities for speculative trading.’ Quasi-indexers, the research notes, ‘tend to be most concerned with the quality of interim and annual reports, which reduce the cost of their ongoing monitoring activity… Management forecasts of quarterly earnings and other timely IR activities are relatively unimportant.’
But dedicated investors ‘appear to be largely insensitive to disclosure quality’, defined as the quality of annual and interim reports and quantity of IR activities, including access to management. The research posits that this insensitivity may be due to possible insider access, including board seats that the concentrated positions may give dedicated investors.
I think there’s another possibility: dedicated investors may take a long time to get to know a company and its management before they take a stake but, once they do invest, they increase their position and tend to overlook quarterly noise. In my experience, they have an understanding of management’s thinking through more than just a quarterly cycle. And that insight comes through ‘corporate access’ – the old-fashioned way.
Business and financial journalist Brad Allen is a former IRO and served as NIRI national board chair between 1996 and 1997
This article appeared in the Summer 2016 issue of IR Magazine
