IR Monitor – 17 May 2023

This week’s news

Why equity research fails over & over

Rupak Ghose, a fintech adviser and former research analyst, has chronicled his experience of being an analyst in the late nineties in Alphaville this week – stipulating the reasons why equity research is no longer as extensive and reliable as it was in its prime. Ghose credits this decline to lessening information advantage, a dwindling client base, new competitors and also (it should be noted) to larger IR teams. While he acknowledges regulatory change is afoot, Ghose dismisses any notion that equity research will make a grand return. “The era of star analysts died years ago, and isn’t coming back.”, he says.

Support shareholder loyalty and long-termism with a rewards programme

Equity holding periods have seen a significant fall over the past six decades – with the average holding time for individual stocks across the US currently standing at just 17 weeks. The solution suggested by Stakeholder Labs is for listed companies to muster shareholder loyalty and long-termism through a rewards programme. The rise of commission-free mobile apps has brought millions of fresh retail investors into the stock market. They could play a role in reinstating long-termism, but Stakeholder Labs argues they need to be incentivised to keep their money in one company. Citing Disney, McDonalds and Carnival Cruises as examples of companies which have used shareholder rewards programmes to increase investor loyalty, the article argues for the wider adoption of such policies across the market.

Targeting new investors is key

This week IR Magazine published their latest “Goals & Challenges” report – which observed that over three in 10 Investor Relations Officers have listed finding new investors as their top priority moving into the year ahead. This objective has been prioritised over engagement with existing shareholders, which only 22% cited as their principal ambition. While a third of respondents still identified internal corporate affairs a key concern, the report found that IROs were less concerned with capital markets-related challenges than they have been in previous years. There are, however, global discrepancies – with North American IROs showing considerably more interest in targeting new investors than their Asian counterparts.

The City needs to embrace risk 

The City of London is facing significant challenges, but the Financial Conduct Authority (FCA) is leading a regulatory overhaul to make London a more business-friendly place. Schroders’ CEO Peter Harrison thinks the FCA should be applauded for recognizing the importance of taking risks to achieve returns, which is a fundamental principle of the financial industry. Whilst government-sponsored reviews and proposed reforms by Chancellor Jeremy Hunt and the Prudential Regulation Authority are making progress in improving the financial services sector, many regulators and politicians believe that reforms are necessary. For instance, compensation seems to be at the forefront and Julia Hoggett, CEO of the LSE, has called for higher executive pay to retain talent and prevent companies from relocating. Others suggest that the UK should focus on innovative sectors like Life Sciences and green technologies, where growing assets like blockchain will play a crucial role in the growth of the private market. All in favour of a vibrant market, the consensus is calling for urgent reformations to ensure that the country capitalises on London’s long-term strengths.

Will AI robots put overpaid fund managers out of work?

An article in This Is Money highlights the influence of AI on fund management and its potential impact. Rather than relying solely on human experts, investment funds might be managed by intelligent AI tools, potentially replacing mediocre fund managers. Even if not entirely run by AI, managers could benefit from AI assistance in selecting stocks for their portfolios. AI-managed funds could offer investors consistently better returns than index trackers and potentially outperform experienced active fund managers. For instance, an experiment using ChatGPT to create an investment portfolio was recently conducted by finder.com. A portfolio of high-quality stocks was assembled, outperforming a portfolio of ten popular UK investment funds during the test period. This offers a glimpse into a future where AI might become a crucial part of the investment landscape – fund managers may need to adapt to this emerging trend and, by extension, IROs too.

And finally … a $300 million bar tab to hang out with Jay-Z. 

Typically, CEOs reap an ample number of benefits and freedoms when heading up a company, but Bloomberg Opinion makes it clear that with this freedom comes great responsibility. And, more often than not, a board of directors and shareholders to answer to, holding those accountable in times of poor decision-making.  Nevertheless, there are cases where boards fail to provide adequate oversight. When Block Inc., formerly Square Inc, acquired artist Jay-Z’s struggling streaming platform, Tidal, shareholders sued and lost the dispute over the $306 million deal. In this case, the Delaware “Business Judgement Law” validated the acquisition, allowing the Board to make “poor decisions without significant liability”. The takeover committee did ask questions and answers provided by management were blamed to be inadequate. Despite this, CEO and Chairman Jack Dorsey went on with the acquisition, which was validated by the Takeover committee unanimously through a process that was deemed good enough by the court. As Matt Levine puts it, “The law can make boards of directors check the right boxes, but it can’t make them make the right decisions, and it doesn’t try.”

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