Investor Relations - LSEG

08LiquidityOne of the outcomes quoted companies aim forfrom their investor relations activities is to attractliquidity – frequency of trading in their shares.Profiling and explaining the company to theinvestment community on a continual basis canassist in creating greater awareness of a company.Depending on the availability of shares, this canthen assist a company in attracting pools of buyersand sellers and the potential for higher frequencyin the trading of its shares.Getting the balance rightPractising investor relations will not automaticallyguarantee a company heightened profile, easyaccess to capital, liquidity in its shares or a fairshare price. Naturally, other factors outside and inaddition to a company’s own activities, such as theeconomic situation, a company’s fundamentals,confidence in its management team, the availabilityof shares and competition for investors’ money, canhave an impact on how a company is perceived,funded, traded and valued by the market.Fair valuationSimilarly, one of the other main goals of investorrelations is for a company to achieve a fair marketvaluation, ultimately reflected in the share price, bymanaging expectations in relation to the company’scurrent and future performance. Communicating toand with the investment community will enable acompany to detail its own record of its performanceand its strategy using publicly disclosed information.It will also help a company to understand how it isbeing evaluated and whether or not the market’sexpectations towards, and understanding of thecompany are in line with its own.Rather, the aim of embarking on an ongoinginvestor relations programme is that it enables theinvestment community to have greater awarenessof the company’s investment case and commercialactivities so that shareholders, potential investorsand traders, can each take an informed view and adecision as to their involvement with that particularcompany.What Investor Relations is and who it is aimed atFor many quoted companies, the balance will beabout updating those who already follow or investin the company and profiling the company to newaudiences.

Investor RelationsCOMPANYCommunicationsInstitutional InvestorsReturn UK & overseas financial institutions Insurance & life assurance companies Unit trusts, investment trusts, Venture Capital Trusts Enterprise Investment Scheme investors Pension funds, hedge funds & sovereign wealth fundsPrivate InvestorsAccess toCapital Individual & high net worth investors Employees Private client stockbrokers Personal wealth managers/financial advisersLiquidityFairValuationAnalysts Sell-side Buy-side Company sponsored/paid-for researchMedia Print Broadcast On-line/new mediaOutputWhat Investor Relations is and who it is aimed at09

Institutional InvestorsAndrew Buchanan, Executive Director, UBS Corporate BrokingLong-term, concentrated supportInstitutional investors are, by some margin, themost important category of investor to quotedcompanies owing to the sheer weight of assetsthat they manage and the degree to which they caninvest. It is widely acknowledged that institutionalinvestors own the vast majority of the UK equitymarket. In some cases, institutional investors mayalso own nearly all of a company’s issued sharecapital. Their influence extends beyond their totalassets under management since, compared toindividual private investors, investment decisionmaking, including voting, is concentrated in a muchsmaller group of individuals.A key attraction of institutional investors tocompanies is that the bulk of assets they manageare long term in nature which means that theirinvestment horizons are also long term. This meansthat institutions generally form a fundamental viewon a company’s long term prospects and aretherefore able to look beyond short run volatility inits performance. Such support is extremelyimportant in allowing management teams the timeand space to be able to execute their strategicplans. That said, most institutions have a fiduciaryduty to achieve best value for their underlyinginvestors and will only tolerate short termunderperformance so long as it remains consistentwith eventual delivery of long term value.Managing pooled assetsInstitutional investors are those investors whomanage pooled assets, ranging from VentureCapital Trusts to mutual funds, unit trusts, lifeassurance and pension plans, which individuals orother investment firms collectively invest into. Thisis an important distinction from individual privateinvestors who invest their own money.10What Investor Relations is and who it is aimed atThe institutional asset management industryoperates globally and is very diverse in terms of thevariance in size and depth of funds that firms haveunder management. Similarly, there is wide diversityin the areas that institutional investors focus on andthe investment strategies they deploy. For example,funds may be tailored to offer very specificinvestment including pure exposure to a particularcountry, region or industry sector, whereas otherfunds may only invest in certain asset classes or beseeking a specific income level, perhaps throughdividends, or a certain growth profile.In addition, some fund managers will approach theirinvestment selections on an ethical or corporatesocial responsibility basis. Others may allocatefunds to companies considered to be large or smallsized businesses. Although institutional investorsinvest across markets such as AIM and the MainMarket, fund mandates may dictate whatpercentage of a fund can be allocated to a certainmarket, industry sector or even shareholding levelin any one company.Hedge funds, long only investors and sovereignwealth fundsHedge funds are an example of a more recentspecialist category of institutional investor. Thereare several features that distinguish a hedge fundfrom other types of institutional investors. Forinstance, hedge funds are often lightly regulatedentities which means that they are prohibited frommarketing their products to certain categories ofinvestor, principally non-professional individualinvestors. Their clients are usually wealthyindividuals and other institutional investors. Similarly,hedge funds generally adopt relativelyunconstrained investment strategies which allowthem to invest across asset classes andgeographies as well as use leverage in their

portfolios, including short-selling. This last point is akey differentiator from the more traditionalmanagers. Use of leverage in investment portfoliosincreases the risk exposure to the investors and isone of the reasons why regulators have restrictedtheir availability. The more traditional assetmanagers who do not use leverage techniques,such as short-selling, are often referred to as ‘longonly’ investors.Sovereign wealth funds are another sub category ofinstitutional investor that have risen in importance inrecent years. As their names suggest they areinstitutions constituted to manage national wealth,the source of which typically arises from significanttrade surpluses. Whilst a number of them haveexisted for many years the long period of economicgrowth between 2003 and 2007, which was markedby considerable East-West trade and a protractedbull market in commodities, generated significanttrade surpluses in oil producing countries such as inthe Middle East, Norway, Russia and exporterssuch as China and Singapore.Benchmarked performanceWhatever the pool of assets under management is,the common goal for institutional investors is tomake investments that achieve a total return eithervia income or capital appreciation, or both, for agiven level of risk. The investment return objectiveswill be driven by the needs of the underlyinginvestors and asset managers will design investmentstrategies, their products, to meet these needs.target a two percentage point out-performanceagainst the FTSE All Share index. Out-performancerelative to the benchmark is often called ‘alpha’ bymarket practitioners. Strategies aimed purely attracking index, or ‘beta’, performance areincreasingly popular since they are cheaper toadminister and more consistently deliver against thebenchmark. Investors seeking alpha have had topay more in fees to cover the costs of, and, in somecases, just to get access to the most skilledinvestment managers.Focus on key investorsOne of the most important steps for quotedcompanies is to identify who are the most importantindividuals at shareholder and target shareholderinstitutions they need to build relationships with.Investment decision making for particular fundsmanaged by firms is usually concentrated in a smallnumber of individuals. Whilst they may rely to agreater or lesser degree on advice andrecommendations from internal analysts andexternal analysts and sales people, ultimately theyare accountable to their investors for theperformance of the funds they manage.In order to make best use of the time spent oninvestor relations, companies will need to identifythe most significant institutions and individuals andalso what their current opinion is on the company.Armed with this information, companies can thenset about allocating their resources to best achievetheir objectives.Fund managers will generally adopt a benchmarkagainst which they and their clients can assess theirperformance. These benchmarks are usually a stockmarket index. The assessment is therefore arelative measure of performance. For example,actively managed core UK equity mandates oftenWhat Investor Relations is and who it is aimed at11

Institutional InvestorsA Fund Manager’s ViewHarry Nimmo, Head of Smaller Companies Equities, Standard Life InvestmentsKnowing your investorsInvestors in quoted companies come in all shapesand sizes with a multiplicity of requirements, risktolerances, investment styles and processes.Indeed no two investors are the same and mayactually approach the purchase of a company’sshares from equal and opposite directions. It isfortunate that this is the case as it takes buyersand sellers to make a market. From an investorrelations perspective, it is therefore important thatquoted companies know their investors.At the most basic level it is worth knowing whetheran investor is seeking income or capital returns or acombination of both. An idea of the risk tolerancesof the investors is also of importance. Someinvestors for example will not invest in ‘blue sky’companies that are more concept than revenuesand profits. Other investors follow stock marketindices very closely to reduce risk. It also makessense to know whether the investor has largefunds under management or is a small boutique andwhether they specialise in investing in large orsmaller quoted companies.Growth vs. valueThe rudiments of the investment process are ofmajor importance in the investor relations mix. Themajor categories can be broadly termed ‘growth’and ‘value’ although there is a fair degree ofoverlap between the two. Growth investors will beprimarily concerned about the future growthprospects of the business in question. They mayadd ‘momentum’ to their thinking on the basis thatgreat share price performance has longevity andmay be extrapolated into the future.12What Investor Relations is and who it is aimed atThe value investor however is looking forcompanies that are out of favour because the shareprice and/or the business have been performingbadly. They may in particular be looking for a shareprice fall, possibly after a profit warning as anopportunity to get involved in a share. The textopposite details what fund managers typicallyconsider when assessing whether to invest in acompany or not.Long only institutional investorsThe group of investors to pay most attention to arethe large, long only institutional investors with goodcash-flow into their funds, a track record atinvesting in your company’s asset class and with atendency to hold their investments for extendedperiods. They are the investors who are likely to bethere for a company’s next round of capital raising.They are the investors who will add quality andrespectability to your shareholder register thusencouraging others to invest. It is also worthknowing the performance track record of the fundmanager or institution involved. If a fund manageror institution is known in the industry to beparticularly shrewd this in turn might encourageother investors to ‘get involved’.At a micro level there are clearly a number ofsources of information for the institutional fundmanagers when looking at potential investment.Broker written research, personal contact,company announcements, published accounts andthe internet, are all of importance. However, the keydeterminant is the face to face meeting betweenanalyst, fund manager and senior executive of thecompany. Potential institutional investors may meeta company several times before investing andvaluation is often the determining factor in the end.However it is worth persevering particularly with thebetter ‘quality’ investors.

What Fund Managers willbe looking for in companiesFund managers will be seeking to understand thedynamics of the business in which the companyoperates and in particular, potential growth ratesinto the future. The track record of the companyand its senior executives will be of importance.‘Quality of earnings’ will often govern how much afund manager will pay for a particular share. Apredictable earnings stream and growth trajectoryis of great value. Corroboration of profit and lossaccount by strong and predictable cash-flow isimportant. The defensibility of a company’smarket, in terms of its control over the pricingpower of its products or services, barriers tocompetitive entry and levels of market share areall factors key to investors.The expression ‘quality of management’ is almostimpossible to measure or describe and in reality isa much broader term. Essentially it relates to thedepth of the management team, successfullyexpedited growth strategies and the area of‘corporate culture’. In terms of growth strategy,organic growth is generally favoured to acquisitivegrowth, however evidence of skill in the latter maybe a major attraction.A final group of categories would include‘valuation’ which could be based on a wholeseries of variables, for example P/E ratio (price-toearnings ratio), or EBITDA (Earnings beforeInterest, Tax, Depreciation and Amortisation).Private InvestorsRussell Cook, Director of Corporate Finance,Charles Stanley SecuritiesWhy are private investors important?All quoted companies should seek to have adiverse range of investors on their share register.Typically, the majority will comprise a range ofinstitutional investors who will invest according to arange of criteria, in the main dictated by thestructure and requirements of the funds theymanage. Institutions tend to be longer-terminvestors, whereas private investors, who willcomprise the balance of the register, often haveshorter-term aspirations. Private investor interestsmay be driven by changing sentiment towardsindustry sectors; perceived value opportunities(such as a valuation anomaly); by income (anattractive yield); or by tax-efficiency, although thereare a range of restrictions on the buying and sellingof shares for these purposes, such as having tohold them for a minimum time period in order toclaim the full benefit.Most importantly, from the company’s perspective,private investors often buy smaller parcels ofshares, providing much-needed liquidity in thecompany’s shares, especially in those cases wherethe shares are tightly held. Indeed with manysmaller quoted companies, where it is notuncommon to find a greater proportion of privateover institutional investors, it is private investorsthat provide the majority of the liquidity.The investor also has to get hold of the shares.Clearly the level of free float (shares available tooutside investors and thus not in strategic orrelated party hands) will impact this so companiesneed to give this some consideration to ensuresufficient liquidity in their security.What Investor Relations is and who it is aimed at13

Liquidity is vitally important as it can contributetowards a higher or lower share price. In verysimplistic terms, a hypothetical company in anattractive industry sector with a track record ofdelivering good results and with a well-diversifiedshare register and reasonable levels of buying andselling in its shares, should maintain a consistentlyfair share price – in part because it has a consistentapproach to investor relations, spending time andeffort courting institutional and private investorinterest to the extent the latter will want to buyand/or hold the shares.Contrast this with an equally hypothetical companythat has an inconsistent or non-existent approachto investor relations, that is in an out-of-favoursector, with a mixed track record in terms of resultsand with little trade in its shares: it is likely to havemore sellers than buyers. Whilst the conclusion todraw from this comparison is obvious, it isimportant also to remember that stock marketliquidity is itself a function of a blend of relativestock market health and activity and economicconfidence.Who are private investors?Private investors are members of the public whobuy shares in quoted companies. They may buyshares directly, without taking professional advice,via an execution-only stockbroker or internet-basedshare dealing system; or they may pay for advicefrom a private client stockbroker and buy shares onthe latter’s recommendation, or, alternatively, leavetheir stockbroker to structure their investmentsaccording to their particular needs and make someor all investment decisions on their behalf under aso-called advisory or discretionary clientagreement.14What Investor Relations is and who it is aimed atThere is also a sub-set of private investors: peoplewho become shareholders in quoted companies byvirtue of being shareholder employees of acompany that goes through flotation; by holdingperformance-related share options; or bypurchasing shares via company-sponsoredschemes. In all cases, these shares may, ultimately,become ordinary (tradable) shares, althoughcompanies may impose restrictions on whenshares can be bought or sold.Unusually, the UK offers companies and privateinvestors a range of tax-efficient investmentopportunities. These include investments made inshares of companies quoted on AIM; in VentureCapital Trusts (VCTs

successful investor relations strategy. Key Practicalities. What investor relations is and who it is aimed at This section of the guide examines what the term investor relations means and focuses on the reasons why a quoted company would c