IR Monitor – 12th July 2021

Investor Relations News

We begin by looking at the CFA Institute’s recent survey, which looks at the material impacts of the recovery from the pandemic on the economy, and reflect on what this can teach investors. We then look at how Royal Dutch Shell is modernising its dividend distribution and consider how this could be applied to other FTSE companies. Following this, we look at how the EU’s focus on regulation undid its attempts to dethrone London as Europe’s key financial centre. We go on to discuss the call for sweeping reform of City rules to stop private equity groups’ continuing raid on UK public companies. Next, we delve into the City watchdog’s relaxation of listing rules to beef up London’s appeal as a tech centre. And finally, we look at how Tesla’s entry to the S&P 500 has cost investors almost $50bn.

This week’s news

Capital markets entering uncharted waters

Between 8 – 28 March this year, the CFA Institute conducted a survey of its global membership, in which it analysed the effects of the current economic crisis on financial markets and the investment industry. City AM took a look last week at the key themes identified in the survey report, COVID-19, ONE YEAR LATER, in which the CFA Institute studied how the recovery from the COVID-19 pandemic is affecting the economy in materially different ways. One theme is how the varying material impact of the crisis has spurred different recoveries across different markets, with 44% of survey respondents seeing recovery taking the form of a K-shape. Another theme is that the real economy has been outpaced by equity markets, which have benefitted from monetary stimulus; but almost half of the respondents agreed that this quick recovery is due for a correction within the next one to three years. Of perhaps most relevance for the IR community, it would appear that the risk of corporate credit default is on the rise; so companies should provide investors with more forward-looking information to enable them to assess the impact of the crisis more precisely.

FTSE should follow Shell’s lead on dividend payment

Using Royal Dutch Shell as a case study, IR Magazine has taken a look at how the firm modernised its dividend distribution to deliver better value to investors. By streamlining its dividend distributions, Shell has saved millions of pounds in cash every year, through reduced foreign exchange leakage, admin costs and banking fees. Shell’s dividend modernisation stemmed from the IR team encouraging the company secretariat to work with the treasury team; the result was an overhaul of the registrar’s arrangements applying best treasury practices. Other FTSE companies may want to take a note from Shell’s book and particularly those companies that still pay dividends by cheque, as cashing a dividend cheque requires many physical steps and often includes air travel. Shell also distributes via a central security depository and employs real-time payment systems to enable same-day settlement, reducing the amount of time cash is not accruing interest. There are many steps FTSE companies should be taking to modernise dividend distribution and these will ultimately save money.

The EU plot to destroy the City has been a failure

The predictions, since 2016, that asset managers would decamp from London to Amsterdam and Dublin threatened to shift the focus of the IR community quite dramatically. But it has not worked out like that. The recent news that London has reclaimed its position from Amsterdam as the key centre for equity trading suggests that those fears may have been unfounded. The Telegraph has suggested, furthermore, that the EU’s attempts to control the continent’s key financial centres were fumbled by Paris and Frankfurt and by the European Commission’s relentless emphasis on rules and regulations. The reality is that most of those rules can be easily worked around, and if business couldn’t be done in London, there was the more likely option of switching to New York (which has market access). Less than six months after Amsterdam claimed the top spot for equity trading immediately following the UK’s departure from the EU, London has regained its pre-eminence as a financial hub – thanks in large part to its decision to allow trading in Swiss shares (which is banned in the EU).  Had Paris, Frankfurt or Amsterdam offered incentives, such as a financial free trade zone, that could have been a serious threat. Brussels now finds the continent’s main financial centre outside of the EU’s regulation and The Telegraph suggests this will likely go down as one of its biggest mistakes.

PE raids prompt rethink of UK rules

Private equity groups will continue their raid on public UK companies unless there is a sweeping reform of City rules to lighten the load on PLCs, according to the chief executive of Schroders. The Financial Times has reported that in the first half of 2021, private equity firms announced bids for UK-listed companies at the fastest pace in more than two decades, taking advantage of depressed valuations as a result of Brexit and the pandemic. The latest assault saw a trio of private investment groups (led by SoftBank-owned Fortress) announce a £9.5bn deal to acquire Wm Morrison, Britain’s fourth-largest supermarket chain. Peter Harrison, chief executive of Schroders, said the UK governance code was “written at the expense of public companies” and could be “very onerous” for them. He cited also other factors at play, namely the incentive structures in the fund management industry, which “don’t support long-term thinking.”

FCA wants London to be easier for tech floats

The City watchdog has moved to relax the listing rules to beef up London’s appeal as a tech centre. Strict rules on dual class shares (which make it hard for entrepreneurs to sell stock in a float while keeping control of their businesses) look set to be eased. According to the Evening Standard, the FCA is to consult on plans to cut the number of shares in a floated business that must be in public hands from 25% to 10%. This move should boost the appeal of London to “unicorn” tech businesses seeking to raise funds. Figures from the FCA show the size of the problem the watchdog wants to address. Between 2015 and 2020 the UK accounted for only 5% of IPOs globally, a poor share for the second largest global financial centre after New York. The FCA plans to move fast: it will consult for 10 weeks and implement new rules before the end of this year with the aim of widening the range of companies listing in the UK.

And finally … buy high, sell low?

The Financial Times has reported that Tesla’s entry into the S&P 500 has cost investors tracking or benchmarked against the index of blue-chip US stocks more than $45bn since December. The electric vehicle pioneer was already the world’s seventh-largest listed company when it was finally admitted to the S&P at the end of 2020. Its stock had rallied 764 per cent in the 12 months beforehand, partly in anticipation of forced buying on entry to the S&P 500. Its share price then fell in the six months after its admission while the stock it replaced, Apartment Investment and Management (AIV), rallied 48 per cent. According to Rob Arnott, Chair of Californian investment house Research Affiliates, this rebalance cost investors 41 basis points of their portfolios: a tidy sum given that the S&P 500 is directly tracked by about $4.6tn of capital. The research supports the view many active investors have long held about market cap-weighted indices: they have a tendency to buy high and sell low. Moreover, entry to a prestigious index is not the golden ticket some companies consider it to be.

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The views expressed in this article are those of the author(s) and not necessarily the views of FTI Consulting, its management, its subsidiaries, its affiliates, or its other professionals.

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