DIRFDAGEN 2017 How is MIFID II expected to affect issuers and investor relations?

Transcription

1 DIRFDAGEN 2017 How is MIFID II expected to affect issuers and investor relations? Simon Chisholm Feros Advisers Copenhagen 28 September 2017

2 Agenda Introduction The Philosophy Behind Regulatory Change The Retail Directive Review (RDR) MiFID I MiFID II The Market For Research What Can Investor Relations Do? 2

3 Introduction Simon Chisholm, Feros Advisers Qualified ACA, PricewaterhouseCoopers Singer & Friedlander, European Fund Manager Henderson Global Investors, Associate Director, Head of European Smaller Companies Berenberg Bank, Co-Head of Equity Capital Markets Feros Advisers, Founder (See Appendix) 3

4 The philosophy behind regulatory change Why the need for regulatory change? Retail fund operating margins c38%* - why? Because asset managers used client money to pay for trading, research, travel etc, etc, etc Competitive industry behaving like a monopoly regulator seeking to protect the end retail investor * Source Financial Times, 20 th November

5 The Retail Directive Review (RDR, UK 2012) The First Material Change To The Regulatory Environment Aimed at reforming the sales and distribution of financial products Philosophy: Materially alter and improve the interactions between the consumers and the industry Main conclusion change the way products were sold! Traditionally a commission was paid by the product provider. This lead to misselling, but reducing fees would challenge the business model of the advisers * Source Financial Times, 20 th November

6 The Retail Directive Review (RDR, UK 2012) Challenges of a commission based model: Results (and why this is relevant for MiFID): Distorts incentives to recommend higher commission products No transparency Cross subsidization of clients. True cost of advise unknown to customers and firms The proposed RDR solution: Ban on commission payments from providers (2012) Requirements to establish a charging structure disclosed upfront (2012) Decline in adviser numbers from 2011 to 2014 by 23%, from 40,500 to 31,150 mainly driven by banks leaving the space (legacy costs structures were too high) Investments in technology as a differentiation but this reduced margins and enabled customers to go direct to the product providers. Significant reduction in profitability leading to 25% reduction in capacity Change in revenue model from commission to cost based resulting in a much smaller market * Source Financial Times, 20 th November

7 MiFID I (EU 2004, implemented 2007) About MiFID I Markets in Financial instruments Directive 2007 (process started 2004) followed the ban on softing In technical terms, this was about post trade transparency, great freedom and choice with regard to execution where people trade / have to trade, where it is cheapest, quickest etc and best execution By reducing costs for asset managers this would benefit end customers. WRONG! Why did MiFID I not achieve the expected results? Political pressure industry promised to self police Greed. The advent of commission sharing arrangements (CSAs) and the requirement for best execution meant bulge bracket banks tried to game the system. 10bps for trading and 15bps for research (and sales for free!) Technology - asset manages could bypass banks and go direct to market (DMA) End Results - asset managers profit margins unchanged, investment banking secondary revenues fall, retail investors still being overcharged 7

8 MiFID II (EU 2014, implementation 2018) About MiFID II Core objective is to establish transparency of payments for services and abolish commission payable for investment advice, research, and corporate access. Impact on Equity Research Can be paid for in one of two ways: Either our of Asset Managers P&L or via Research Payment Accounts (RPAs) What is an RPA? Client funded But needs to be pre-budgeted, specific research charge amount disclosed to investors only pay for qualifying research, must disclose how much budget vs. how much they spent Major players (latest: BlackRock, JPM AM, AXA etc) paying out of own P&L Net result commission will continue to fall 8

9 The market for Equity Research An inefficient market Most organisations sell a product / service for an agreed price at time of a transaction Investment banks give research in hope for getting trading commission Buyside uses clients money little incentive to make sure research was right for them This led to the advent of waterfront coverage, effectively the cross subsidisation of research The decline in broader investment banking revenues from $8.2bn in 2007 to c $3.5bn today means research has to become self-sufficient and cannot rely on a broader holistic cross subsidy Implications for Equity Research An important, albeit not crucial, part of the investment process Number of providers / amount of research will decline materially Expect more banks to start charging directly and indirectly Corporate proactively sell side Why should an analyst cover you? What is in it for them? 9

10 The market for Equity Research What is going to happen? Research to move to priced environment expect corporates to pay Sell side consolidation less analysts Growth of independent research BUT: Stock exchange coverage Issuers sponsored inevitable see bond markets for details 10

11 MiFID II: The law of unintended consequences Financial Times, 1 Feb 2017 : To clean up a murky business, regulators have in effect killed it off FT 26 Feb 2017 FT 27 Jan 2017 FT 7 Jan 2017 Economist 26 Apr 2014 FT 12 Feb 2017 Efinancialcareers 21 Sep 2016 FT 7 Feb 2017 Bloomberg 19 Sep 2016 FT 24 Feb

12 What can Investor Relations do? Have a proactive communications strategy Have a strategy for the equity of the business, integrated into the broader corporate strategy Invest your management time, don t spend it Build direct relationships with the right investors to support future capital markets activities Remember if you are roadshowing with banks you see their highest payers not necessarily the potential investors in your stock If you have banking relationships you value how are they getting paid? Paid for research? Banks will start charging for research but turns analysts into profit centres 12

13 What can Investor Relations do? Understanding the Asset Manager Average asset manager runs around 100 positions and makes maybe 20 new investment decisions a year Average asset manager meets 400 different companies a year so 5% of the time says yes 95% of the time says No Identify what your investment no s are and deal with them in the presentation Meet the right investors, present the information they require, in the format they require to make a decision Build proactive relationships 13

14 What can Investor Relations do? Understanding the Asset Manager Investment managers have a process Give them the information they need, in the format they need it to facilitate a decision Do they buy earnings momentum or CFROI.. (did you ask?) Use your investor meetings strategically ask questions such as what is the core of their process, what information can we disclose and in what format to be helpful, what multiple do they look at, what can we do better, etc 14

15 Thank you Q&A 15

16 Appendix: Background data on MiFID II and equities markets 16

17 Institutional investors reaction The European buy-side s initial vocal resistance against MiFID II has now succumbed to acceptance. The regulator s aim is clear: PMs are not to use client money to pay for services that the client never asked for. Buy-siders are faced with significant challenges to implement systems that make them regulation-compliant. It becomes obvious that spending on research will decline substantially. The compliance/system angle Asset managers will have to comply with a far-reaching set of new and additional reporting requirements. Fund managers will have to provide 65 different pieces of data. They will need to prove that research consumed had an essential role in an investment decision. European asset management industry expected to spend EUR 2.5bn on implementation measures.* At the beginning of 2017, more than 50%* of European AMs did not have their systems in place to cope. That means the full impact on the sell-side might only be seen in In-housing of capacity Asset managers are increasingly in-housing research. 38% of fund managers said they wanted to hire analyst capacity at the start of 2017.*** New avenues of alpha-generation are explored, for example in-housed or outsourced but proprietary on-the-ground research (counting customers etc). Paying only for what creates value Former Legal&General PM: The average PM receives c 500 analyst reports a day. Eliminating information overload is probably the biggest thing the buy-side is looking for. Only between 2-5% of research produced gets read at all. This shows the magnitude of decline possible if only what is read is paid for. New technology and free providers such as Seeking Alpha are now serious competition for research. Estimates are that after unbundling, spending on research will decline by between 30-50% immediately.**** Unbundling: PMs can either charge clients extra money, or pay out of their own P&L for research. Both means they pay less. Not asked for research will not be paid for. Implementation of MiFID II compliant systems is very costly. Less complexity (e.g. fewer brokers used) reduces cost. What investors often really need is corporate access. Source: *Optimas, **RSRCHX, ***ERI, ****FT, Quinlan& Associates 17

18 Joining it up: facts & figures Commissions paid are under pressure, and will continue to reduce Outlook Global research revenue (USD bn) The number of analysts will decline, their salaries will reduce, and they will be younger Asset managers budgets for external research will continue to decline. Henderson, for example, has already cut its budget by 50% over the past three years. Estimates are for a further 30-50% decline from here. Jupiter, as another example, just recently announced it would only spend 5m annually on external research. Combined with a more competitive market for ECM business, banks will have to reduce costs in cash equities. Analysts at 12 largest banks Total global analysts Business case for banks to finance analysts isn t a given anymore. Equity research is an unattractive field to work in: declining business, declining and inferior pay to other front-office positions. Younger analysts will take over, and often leave after finding a buy-side job, increasing rotation and churn. Sources: FT, Edison, Frost&Sullivan, Quinlan and Associates 18

19 Don t blame it all on MiFID II The decline of the sell-side business model has other contributing factors independent of regulation. An industry that has barely evolved since the 1920s has not caught up with technological changes. The rise of passive investment means less human input is needed. Technology Even the UBS Head of Research admitted: If I showed you an equity research report from the 1920s and one from today, you d be surprised how similar they are Nomura recently slashed its equity-research division to focus on its electronic-trading business, Instinet. Other banks are also cutting back. Sector coverage has contracted: large banks now concentrate on large-cap sectors like oil, where trading volumes and revenue potential are higher and they can leverage their trading systems. Technology providers and data aggregators enter the space. Lots of what used to be manual analyst work (particularly entering and analysing historical trends in numbers) can today be automatised. Providers such as Bloomberg or Reuters in the meantime offer very comprehensive analysis, such as the BI platforms - free of investment recommendations (which investors anyway do not care about, it is their job to make them) but with solid data and analysis on companies and sectors. Passive investment In the UK, index-tracking funds represent 11% of industry total funds under management at the end of 2014, up from 6% in While the majority of equity funds remain actively managed, the increasing number of passive or semi-passive ( smart beta ) strategies cannot be ignored. 19

20 Appendix: Feros Advisers 20

21 What we do We have an established and proven track record of identifying, establishing, building and maintaining strong bonds between a company and its investors. Our philosophy is to identify what differentiates each equity story and then tailoring this to a strategy to communicate effectively, efficiently and frequently with a targeted investor base. We ensure our clients understand the investment processes of the key international investors and seek to build direct relationships between a company and its investors. Our service-based approach consists of three steps: We design 1 a program 2of We deliver 3frequent, targeting, educating We help define the timely and consistent and building direct unique nature of their information to all relationships between investment story. investors ensuring our our clients and the clients build credibility. right owners of their equity. 21

22 Milestones of the process Understanding the business We visit our clients to outline the exact process and fully understand your priorities 1 Investor targeting Peer holdings analysis Feros Advisers database of investor contacts Broker management We help choose the best broker per region Feros Advisers broker contacts help increase coverage Strategy Mission: Use management and IR time as efficiently as possible Translate the corporate strategy into messages and KPIs suitable for the capital market Shortlist target investors not yet invested. Exclude investors not able to invest, rotating out of sector etc Lay out roadshow plan to target new investors and see existing investors. Roadshows organised directly by Feros or through brokers Manage brokers with clear target list. Use most efficient broker in any region 3 Execution Continuous work to optimise impact Roadshow & broker management Investor prep and feedback Preparation Investor preparation for meetings, if possible always directly over the phone; ensures most efficient use of meeting time 4 Feedback Continuous contact with fund managers to collect feedback and views Continuous process Ongoing interaction & monitoring of changes in investor positioning Throughout as required: Advice on IR strategy and equity story, assistance on capital markets events, distribution list management 22

23 Roadshows and investor access 4 Roadshow set-up and management. Starting point: Investor target list. Agree annual roadshow plan mapping out management and IR time for every region. Roadshow organisation, depending on company s preference: -ourselves -through brokers in a managed process We will engage with investors prior to meetings. Pre-meeting call with portfolio manager/analyst on investor interest, investment style, potential questions. Send over summary of investment case and presentation material (all in cooperation with company). Optional: We will travel with the company on key roadshows, advising on the investors seen and their investment style. We collect and collate roadshow feedback and present it to the company. Goal: Use management and IR time as efficiently as possible Continuous improvement of knowledge of investor base 23

24 We proudly work with 24

25 Feros Advisers your contacts Simon Chisholm Managing Director Bjoern Lippe Director +44 (0) (0) Benjamin Glaeser Director +44 (0) (0) John Klein Director +44 (0) (0) Gemma Creed Executive Assistant Feros Advisers Limited is private limited company registered in England and Wales under company registration number Its registered office is at The Courtyard Shoreham Road, Upper Beeding, Steyning, West Sussex, BN44 3TN, United Kingdom. Any unauthorised copying, disclosure or distribution of the material in this presentation is strictly forbidden. 25