IR Monitor – 12 July 2023

This week’s news

The case for Mifid II…

The days of the “rock star research analyst” are long gone – that’s according to Brooke Masters for the Financial Times. She argues that equity analysts are now an “endangered” species, in part due to “regulatory tinkering”. Jeremy Hunt confirmed on Monday evening his plans to remove the requirement to unbundle research costs, which would effectively reverse Mifid II and follow a broader trend currently underway in the UE. However, Masters argues that the business of sell side research has been “deeply flawed” for decades, suggesting recent regulation was ineffective in tackling mainly a lack of value for money. The article highlights the benefits of the cost transparency provided by Mifid II, noting that even if bundling comes back, fund managers may not be prepared to pay high commissions, particularly for “mediocre reports”.

… and the case against Mifid II

Marc Rubinstein for Bloomberg argues that equity analysts only have one way to get paid, and it’s not by unbundling research fees from trading commissions. Rubinsten suggests that, rather than creating the conditions to make money, unbundling turned research into a “money loser”, and capacity left the industry. The piece notes that bundling works best when there is high variance in demand, and zero marginal cost – two conditions that Rubinstein argues are fulfilled by equity research. Rubinstein concludes that if a bundled research model has survived shrinking brokerage commissions, regulatory intervention and European bureaucracy, why change it now?

The post-pandemic return to in-person investor days

Leading IR professionals spoke to IR Magazine about their strategies and best practices for a successful investor day. One key takeaway? In-person is king. The IROs interviewed noted a strong preference for physical events, as the format allows them to show off management bench strength and to bring the investor community in to really see and feel what the company is doing. Furthermore, in-person events allow analysts and investors to see for themselves some of the “intangibles” which may not go into the financial model, but have the potential to make a difference when it comes to competitive edge. Mary Winn Pilkington, Senior VP of IR and PR at Tractor Supply Company, advises that having news is critical for an effective investor-day. “You might have management change, maybe you’re rolling out a new strategy, a new innovation or you think there’s something that’s misunderstood by the market,” she explains. “You’ve got to think about what the goal of the investor day is.”

UK chiefs’ pay: investors are too strict about restricted stock

The level of pay that the UK’s top executives enjoy has attracted criticism from many stakeholders, as the country’s cost-of-living crisis continues to plague businesses and everyday life. The main point of controversy often arises when “bumper” bonus packages are often paid out to top executives during difficult times. The Lex column observes that a potential solution is to mix share plans with restricted stock units, where recipients are unable to take ownership of restricted stock until vesting periods end. UK shareholders have not had a positive response to the idea so far, but chief executives and the FT itself argue that restricted stock options, already a popular option in the US, could represent a viable compromise that investors should consider.

60% of ESG claims not backed up by action, says Fidelity International

A new survey by Fidelity International reveals that approximately 60% of analysts estimate that the ESG credentials of the corporations they cover are not backed up by actions. The research found that, whilst companies are increasingly embedding ESG considerations into their activities and plans, many are not yet on track to reach their sustainability goals. One reason for ESG slipping down the agenda for corporates could be the challenging macroeconomic environment. As Fidelity International China property sector analyst Ming Gong argues: “Most of my companies are either in default or deeply stressed. ESG has been low on their priorities and will very likely remain so in the next 12 months.” However, it’s not all bad news for ESG. Fidelity’s survey also found that 73% of analysts say that the companies they cover are responsive on ESG issues, and more than 50% report that management remuneration is now linked to emissions targets.

And finally… Let’s kill off the City’s old-fashioned paper fetish once and for all

An opinion piece in the FT has suggested that in the City of London’s push to modernise, the markets should consider moving on from paper share certificates. Despite numerous reports, reviews and audits over three decades, the UK is still attempting to modernise and has been overtaken by European and other global markets. While reports differ in their estimates of how many paper share certificates are still in circulation, the case is put forward to replace the physical copies. As innovation in fintech services for retail investors continues to reshape the investment services space, a transition from paper certificates and overhauling “an archaic, inefficient system” represents a good first step in boosting London’s competitiveness. Digitisation of the UK’s shareholding system needs is long overdue.

Contact Us

To be added to the distribution list for the IR Monitor, or for further information on the dedicated investor relations team at FTI, please contact [email protected].