IR Monitor – 17th August 2022

This week’s news

Sound corporate governance matters

Corporate governance matters because it is about how companies conduct themselves. Profits are important but so is how they were achieved. JD Sports is the perfect case study for how shareholders who (initially) tolerate poor governance while their company performs well will (subsequently) learn how it can damage its reputation. Three years on from their first article on the problems brewing behind JD’s doors, Investors Chronicle reports on the events that have transpired since JD first began to come under scrutiny in 2019. One of the sportswear giants major red flags was that the group’s chair, Peter Cowgill, also doubled as its CEO. An awful lot of power to hold. Cowgill made a sudden departure in May this year, following the group’s 2021 AGM announcement that it would ‘divide the current role of executive chairman and CEO by June’. His departure wasn’t the only notable reshuffle with all executives, bar the CFO, also leaving during the year. From the administration of its subsidiary ‘Go Outdoors’ in 2020, culminating with JD repurchasing the company shorn of its debts (and leaving creditors out of pocket), to CMA fines for ‘cartel activity’ on price-fixing – JD Sports is a case study in why corporate governance matters.

Investors may have cold feet, but executives seem happy to put their money where their mouths are

Insiders are buying. In his Bloomberg opinion column, John Authers suggests that this is the most revealing sentiment check there is for US equities. Executives have deep insight into the prospects for sales and earnings at their own companies, and when they move in tandem they send clues to the broader market. While massive insider buying is seen as the most favourable signal, low insider selling can be viewed in the same light; so the two measures should be considered together. When insiders are net buyers of their own shares amid increased market volatility, it does look like a vote of confidence in their own growth outlook and it’s worth following. Insider buying today is good (though not extreme). Professional investors might have a case of cold feet, but it’s meaningful that execs seem happy to put their money where their mouths are.

Activist versus Activist

The Times’ Alistair Osborne reports on the latest example of a wealthy activist investor being served a taste of his own medicine. Under the microscope this time is Nelson Peltz, father-in-law to Brooklyn Beckham and head of Trian Investors 1, the London based spin off from the New York based Trian Fund.  Investors with 43.6% of Trian Investors 1 (Invesco, Pelham Capital, Janus Henderson and Global Value Fund) were left shocked after the company deviated from the mandate with which it was floated in 2018. The shares were initially sold on the grounds that Trian would invest in a single publicly listed target; after an unsuccessful investment (in plumber Ferguson) that policy was changed to allow the company to pursue multiple targets. Moreover, the fund refuses to return the cash and investors are locked in. All this, warns Osbourne, points to the risks of dealing with Peltz: “a man whose activism would go into overdrive if a company tried the same low-ball tactics with him”.

Inside the world of ESG ratings

IR Magazine explores the recent findings by Stanford and Yale University academics concerning ESG processes and outcomes. Academics looked at several concerns regarding ESG ratings and found that, “while ESG ratings providers may convey important insights into the non-financial impact of companies, significant shortcomings exist in their objectives, methodologies and incentives, which detract from the informativeness of their assessments”. They go on to argue that it is rare to find tangible systematic evidence to support many claims about ratings. Among their findings the authors note that large companies receive higher average ratings than smaller companies (a well-documented bias). The study also suggests that ESG ratings are not indicators of future ESG performance.

Analysts are ecstatic again

Citigroup warns that sell-side optimism is back at pre-crash levels. Having a keen sense of what is going on in their assigned industries is key for equity analysts and when things are going well the system works: executives guide analysts towards realistic numbers for growth and profitability. In a downturn, however, wishful thinking prevails: executives are certain that they are taking the correct measures to protect the bottom-line and they try to talk up their prospects thereby leaving analysts with a rather rosy view of reality and ultimately meaning that forecasts remain too high for too long. The Financial Times quotes Citigroup Robert Buckland’s warning that, “In no region or global sector are analysts more cautious than they were two years ago.”

And finally… don’t waste your time with overweight investors

Lastly, we take a look at recent findings from the Journal of Empirical Finance which suggests that fund managers who run marathons deliver higher risk-adjusted returns than those who do not. Runner managers have less “disposition bias” and are prompt to exit losing positions. They have a higher active share, longer duration in their investments, and they hold fewer stocks. The paper also concludes that funds with a greater proportion of runner managers tend to hold more stocks that are on the verge of experiencing desirable earnings outcomes. Perhaps it’s time for us all to start running.

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