The Impact of MiFID II for IROs: An Industry Panel Discussion 17 October 2017 Event Summary

Transcription

1 On the 17 th October 2017, Nasdaq Corporate Solutions in association with the Investor Relations Society hosted an event The Impact of MiFIDI II for IROs: An Industry Panel Discussion at Nasdaq s London offices. The expert panel was comprised of John Woolland, Joint Corporate Broking Head at UBS; David Lloyd-Seed, Director of Investor Relations, Telefónica UK (O2) & Chair of the Investor Relations Society; and Steve Kelly, director of Steve Kelly Research, and was moderated by Shyanika Benimadhu, Director of Strategic Capital Intelligence at Nasdaq Corporate Solutions. The discussion was wide ranging, covering industry trends, and the imminent changes that investment managers will face, along with the associated challenges listed companies will need to address. The panel was in general agreement that there are two main categories of change that the IR profession and the wider financial services industry are facing: 1. the changes brought along by MiFID II; and 2. the secular trends that have been developing in recent years, which may be exacerbated by MiFID II. KEY HIGHLIGHTS: MiFID II will change how the buy side consumes research, with knock on effects possibly impacting the whole capital market ecosystem Geographical differences in how asset managers comply with the new set of rules, even within Europe, are to be expected The sell-side will see a natural contraction in the long term, leading to less coverage for listed companies, with the squeezed middle likely to be the most impacted Corporates are expected to play a greater role in dealing with investor queries and organising investor meetings Data driven solutions are expected to be leveraged by IR teams to make best use of senior management s resources Creating and communicating a clear and tailored message to the buy side, integrating themes such as ESG, will be an increasingly important undertaking for IR teams 1

2 EVENT REVIEW: One of the key changes that will stem from Markets in Financial Instruments Directive (more commonly referred to as MiFID II) will be the requirement for asset managers to separate execution fees and research costs on their P&L. This is expected to lead to greater scrutiny on asset managers spend, which is expected to benefit the ultimate asset owners, thanks to the increased transparency in what they pay for. However, as covered in detail by the panel, the set of regulations is expected to have a number of knock-on effects, both intended and unintended. The Impact of MiFID II for IROs: An Industry Panel Discussion All key players in public equity markets will be affected by the regulation, with the buy side, the sell side and the corporates themselves all facing different challenges from the 3 rd January BUY SIDE: The buy side will be the first to be impacted by MiFID II and how it reacts will impact the whole financial ecosystem. The panellists shared diverse views on the different ways the separation of costs will impact their business model and their interaction with the sell side and subsequently corporates. Investors will need to address who should pay for the research, which had been part of the dealing commission and now will be a cost that asset managers will have to either absorb themselves (out of the P&L) or charge to the end customer (fund investor). Initial signs point to the larger fund houses, such as BlackRock, Vanguard, absorbing the cost of research themselves, with other names such as Schroders and Janus Henderson reversing earlier decisions to charge investors, and also absorbing the cost themselves. The evident reason behind asset managers decision to absorb the cost is for competitive reasons, with clients unlikely to want to foot the bill. This argument is particularly true in an environment where index investment is growing rapidly across world equity markets, notably due to their lower fees. Another reason for investors to absorb the cost is that the complexity of charging clients directly for research would be challenging at the least. It would be virtually impossible to divide prices satisfactorily across clients and the eventuality of certain clients refusing to foot the bill would lead to further complications. Interestingly, the panel was in agreement that a number of buy side players may not have budgeted for this change, and along with the squeeze on fees driven by passive ownership, this will put further pressure on their shrinking margins. 2

3 The panel also shared some interesting insights on how active investors from different geographies are bound to be affected by the incoming set of regulations. Non-European, notably US domestic investors are under no pressure to change and are set to benefit, a view echoed by Carmignac Gestion, with a letter of no action expected to be issued by the SEC. However, a number of international fund managers such as MFS Investment Management, are expected to pay for research globally. It was also noted that within Europe, there may be a disparity in how the rules are applied, with UK and Northern European investors likely to be the most proactive initially. SELL SIDE: A significant takeaway is that that buy side firms are looking to reduce their counterparty links. The cost of research will lead buy side firms to become more selective in the research they use. As a result, there will be a natural decrease of the number of sell side analysts following a given stock, with only the best analysts remaining. In the long term, the panel was in general agreement that there will be fewer sell side shops, with the top names surviving, whilst there will be a rise in demand for boutique sell side specialists that cover specific sectors/stocks. An interesting point raised with regard to sell side coverage was that deeply opinionated research may see a rise, as different sell side players look to differentiate themselves. This would lead to the risk of sell side analysts looking for headline stories, something companies will need to learn to address. A fundamental piece of advice was to not ignore any negative news or rumours, and from a corporate perspective be hands on with regards to the changing information flow around your company. In short, never ignore a bad story. As companies enjoy less sell-side coverage overall, different approaches will be needed to ensure the buy side remains informed with regard to a company s story. One approach will be to use paid-for research to get the company s strategic message and financial performance out to the buy side. With regard to paid-for research, there are two ways for corporates to proceed. The first is to pay for the corporate broking relationship, which includes general equity-related advice, regulatory advice and other, including sell side coverage, a generally more UK-specific approach. The second option, more widespread across continental Europe, simply involves paying a fee directly for a piece of research, which may present an independence issue. 3

4 It was noted that smaller cap companies are already likely to use such an approach, whilst the larger caps will have no need to recourse to such measures. Those that may really see their coverage change are the so-called squeezed middle, which were highlighted as most at risk from MiFID II. As the dissemination and use of sell side research dwindles, brokers role in linking capital to listed companies is expected to start to decline. This will be particularly true for the smaller companies, where brokers may find it less beneficial to retain a presence, due to the smaller fees involved. The expected decline in the role of brokers is part of a longer term trend, with a competitive sell side model, and a market generally perceived as overbroked, especially with regards to large caps. CORPORATES: As the sell side steps back, IR teams are expected to play an increasingly important role and take on some responsibilities currently held by the sell side. IR teams will soon need to, more than ever, be the relay between the market and the boardroom, bringing back knowledge from investors, and providing intelligence on investor targeting. A change that is expected to occur on the back of the new set of regulations is the decline in the number of investor conferences, as the buy side becomes more selective towards the events they attend, putting more pressure on sell-side budgets. The remaining conferences will be those that are profitable for brokers, essentially those where demand is present from the buy side. This change, perhaps accelerated by MiFID II, appears to be an eventuality that was likely to arise. The panellists noted that there had been an explosion of investor conferences, up 10x in Boston in recent years, which regardless of MiFID II, is unsustainable and inefficient. IR teams face the challenge of going to the right conferences, with a poorly attended conference unlikely to impress your CEO. Interesting advice was for IR professionals to increase communication with peers, which can help in the decision of which events to attend. Regarding investor meetings and roadshows, corporates are advised to increasingly scrutinise which brokers to leverage, selecting those who provide access to the most relevant investors, and those that provide the best feedback. Corporate investment banks may also face a conflict of interest as it may be easier for them to get payments in kind from US investors, perhaps leading them to encourage their corporate clients to road-show in the US. Corporates deciding to organise roadshows independently of sell side is another phenomenon likely to develop in the medium term, especially domestically. 4

5 As the sell side gradually takes a back seat, IR teams are expected to increasingly use data and technology to support their day-to-day activities, to maximise internal efficiency and senior management s resources. This implies increasing the leverage of data-driven tools to identify the best prospective holders, investors at risk of selling, and identify the optimal regions to visit and the main themes of client conversations. Corporates are expected to leverage greater third-party support, including market intelligence and information on general macroeconomic trends. The sell side s economic pieces are likely to be less easily attainable, and access to peer research, an important source of market intelligence for IR professionals, may also drop. Such information was highlighted as important for IR professionals to effectively position their equity story in the wider macro and sector environment, in order to contextualise their market positioning. Another sticking point for corporates will be access to consensus data, which may be more difficult to attain as sell side coverage becomes less widely spread. The potentially more challenging environment to access consensus data is something that the sell side are working on; for example UBS is looking to create a product through which all research models will flow and hence be a source of consensus. Returning to the point of investor targeting and hence investor communication, IR teams are expected to go more directly to the buy side, with the buy side already preparing for this change., For example, Norges already has a corporate access team in place. Evidently some buy side firms will go directly to the corporates, if your company comes up in a stock picking process, although there will no longer be the same breadth of facilitators. However, a key point noted by a sell-side member in the public was that the economies of scale offered by the sell side were true and significant, and it made more sense having brokers rather than hundreds of corporate access teams. It is interesting that the sell side is expecting no significant change in terms of the corporate access model, and that it is not the priority in conversations with the buy side, which focus more on the model of research payment. For IR teams, who to target and sell the equity story to will be increasingly important. A part of this process will be gathering views from the buy side, identifying the points that matter most, and creating a strong, tailored investment story. Once this story is refined, IR teams will need to find new ways of sharing the narrative, through more updates, use of their website and other communication tools. IR teams will also need to have a clear and concise view of buy side firms holding your stock and those likely to be interested in yours, with brokers advice losing importance. IR teams will be taking on more of a broking/sell side job themselves and will really need to understand how their equity story fits into the investment profile of given funds and investor portfolios. 5

6 On the point of explaining the company story to the investment community, it was noted that IR needs to do more to integrate ESG into the narrative, as this is an increasingly critical topic for the buy side. Frequent interaction with top and prospective holders is widely viewed as central to the IR role, whilst providing more feedback to the buy side in certain circumstances, is critical. As IR teams come under increased pressure and are expected to have more direct engagement with the investment community, it will be important for company boards to be made aware of these changes and to offer their IR teams the support they need. A clear and direct communication between IROs and their boards will be very important for listed entities to be fully prepared for MiFID II. IR teams will need to continue to emphasise the importance of their role, reminding the board of the link between good IR practices and the value of the company s equity. Conclusion: The event, which was attended mainly by members of the IR community, but also sell siders and industry experts and advisors, offered a number of valuable takeaways. If one single conclusion were to be drawn for IROs, it would be for all IR teams to scrutinise not only how the legislation will impact the wider financial services industry, but more specifically, their investor base and their access to both the buy and the sell side. IR professionals have a responsibility within their companies to keep the board informed of the potential impacts of the legislation, but also strategise and plan accordingly for an ever more rapidly changing investment landscape. This communication being is provided to you by Corporate Solutions, a business of Nasdaq, Inc. and certain of its subsidiaries (collectively, Nasdaq ), for informational purposes only. Nasdaq makes no representation or warranty with respect to this communication or such content and expressly disclaims any implied warranty under law. At the time of publication, the information herein was believed to be accurate, however, such information is subject to change without notice and Nasdaq makes no representation or warranty as to the correctness or completeness of the information. Nothing herein shall constitute a recommendation, solicitation, invitation, inducement, promotion or offer by Nasdaq for the purchase or sale of any investment product, nor shall this material be construed in any way as investment, legal, or tax advice or as a recommendation, reference or endorsement by Nasdaq. Any content not owned or controlled by Nasdaq is provided for your convenience and information only and is not an endorsement by Nasdaq of such third party content. Any use of, and/or interactions with third party content, is strictly between you and the applicable third party in all respects, including, without limitation, compliance with such applicable third party s terms of use and privacy policies. Nasdaq shall have no liability, obligation, or responsibility for any such third party content or activities by you relating thereto. Nasdaq, the Nasdaq logo and Nasdaq Corporate Solutions are registered and unregistered trademarks, or service marks, of Nasdaq, Inc. or its subsidiaries in the U.S. and other countries. Nasdaq, Inc All rights reserved. 6