IR Monitor – 14th December 2022

This week’s news

The man who put consensus earnings estimates at investors’ fingertips

Benjamin Zacks was a broker’s assistant at Merrill Lynch when his brother, Len, an investment banker, approached him in 1978 with an idea for starting a financial-data firm. In the 1970s there were no centralised repositories for analysts’ forecasts and research reports on companies were typically distributed to investors by brokerage firms in exchange for trading orders. So, the brothers started Zacks Investment Research Inc. out of an office with a single desk, the first financial-data firm that collected Wall Street analysts’ predictions for companies’ quarterly profits and distilled them into consensus estimates, forever changing the way the stock market evaluates public companies. Len, a PhD in Operations Research from MIT, developed the software, while Ben focused on marketing and distributing the firm’s products to fund managers and investors. Mr Zacks, who retired as president of Zacks Investment Management in 2019, died on Nov 28th after a long battle with Parkinson’s disease. He was 75. “All equities have some kind of narratives told around them. Ben always said ignore the stories and focus on the fundamentals,” his son Mitch Zacks said.

Investors brace for ESG correction

After over $125 billion of ESG fund downgrades, portfolio managers are trying to digest new regulatory proposals that have the potential to upend Europe’s biggest ESG fund category: Article 8. Europe’s markets watchdog, ESMA, plans to set quantifiable ESG and sustainable investing standards, forcing PMs to rethink how they design and market Article 8 funds. This follows a recent cycle of downgrades from the EU’s top ESG class – Article 9 – to Article 8, after the EU clarified its rules. Downgrading Article 8 funds, however, goes much further and means forfeiting the right to market a product as ESG or sustainable. Only 18% of Article 8 funds (which hold about $4 trillion in assets) currently meet ESMA’s proposed thresholds, according to Morningstar. Asset managers can’t afford to downgrade from Article 8 if they want to keep ESG clients. Jefferies has called it the latest in a wave of regulatory updates causing upheaval and triggering a sense of “mass frustration” among PMs struggling to keep up. But European regulators have made clear they’re determined to set much stricter standards around what fund managers can call ESG and sustainable.

The SEC issues new guidance requiring companies to disclose cryptocurrency risks

The SEC is advising companies to talk to investors about their involvement with digital commodities firms, according to new guidance reported by CNBC. What this means in practice is outlining any risks or material exposures related to crypto assets. The day before the guidance was published, SEC Chair Gary Gensler fended off accusations that the agency has failed to prevent crypto firms from misusing customer funds. Gensler also suggested the SEC would take more enforcement actions if the firms fail to comply with existing rules. The SEC’s Division of Corporation Finance developed a sample letter after a selective review of findings made under the Securities Act of 1933 and the Securities Exchange Act of 1934. A suggested item within the letter asks the issuer to describe how company bankruptcies and subsequent effects “have impacted or may impact your business, financial condition, customers, and counterparties, either directly or indirectly.”

Short sellers’ damning stock reports may get harder to google

Bloomberg has examined what a recent ruling from the EU’s top court means for the investor community. On Thursday, the EU Court of Justice adjudicated that search-engine operators “must dereference information” when it is proved to be “manifestly inaccurate.” The case saw judges weighing in after two unidentified executives claimed they were hit by an online information campaign in 2015 which unfairly criticised the way they ran their business and depicted them as having a lavish lifestyle. Google initially refused to sever the search links, claiming it has worked hard “to strike a sensible balance between … rights of access to information and privacy” but couldn’t go so far as to judge whether the content in the disputed articles was wrong. Despite the ruling, the court maintained that search engine providers “cannot be required to play an active role in trying to find facts which are not substantiated by the request for dereferencing.” Ultimately, the ruling is unlikely to rein in short sellers altogether but it adds to mounting global scrutiny of their activities which are obviously at their most successful when research sends stock prices tumbling.

You can’t tell analysts too much

The line between legitimately informing and completely overwhelming investors is one that is hard to draw, according to Matt Levine at Bloomberg. He points out that while a lot of companies will have IR departments whose basic goal is helping investors understand the company, retail investors (who might own 100 shares and never call investor relations) are not getting quite the same information as Wall Street analysts whose job is to cover the company. The resulting grey area, which covers information that investors appreciate but information that is not so material that you have to disclose it to everyone at the same time, “feels like a somewhat unsatisfying compromise”. Levine’s final pearl of wisdom is that meetings between corporate executives and investors or analysts are very very common, while Regulation FD enforcement actions are very very rare. So, there’s a decent chance that if you tell investors information that you think is in the grey area, you won’t get in trouble for it.

And finally… RIP 747

As the very last jumbo jet rolls off the production line in Seattle, Matthew Lynn at The Telegraph cautions that capitalism has lost the buccaneering spirit which gave us the 747 all those years ago. It is interesting also that Lynn attacks modern capitalism from both ends of the political spectrum: he attacks the “dismal focus” on book-keeping and shareholder value but also the “tyranny” of environmental and governance codes that emphasise box-ticking and form-filling over risk-taking and competitive ruthlessness. The 747 surely changed the world but where will the next comparable opportunity for capitalism come from? Lynn suggests that it could be artificial intelligence, or genetic engineering, or robotics … or even space exploration.

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