IR Monitor – 19 July 2023

This week’s news

It is in the UK’s interest to treat investment research as a public good

While the value of analyst research may not always be obvious to asset managers, the merit of high-quality research is certainly apparent to UK government advisor Rachel Kent. As reported in the FT, by revealing how much investment research budgets have been cut in the wake of unfavourable regulatory developments such as MIFID II, Kent’s newly published Investment Research Review seeks to establish how and why the declining volume of research can be held responsible for some of the City of London’s problems. Principally, well curated analyst notes generate investor interest in stocks, helping to ensure companies are valued appropriately. Kent’s review ultimately recommends that those MIFID rules which have hampered investment research be overwritten. Interestingly, the review also proposes to create a collectively funded “Research Platform” that would stand as a third-party body to fund research, guaranteeing every company coverage by at least 3 analysts. Ultimately, Kent holds that failing to account for the role research plays in capital markets will do nothing to address London’s current difficulties.

Reforms that could save London 

In his recent Mansion House speech, Chancellor Jeremy Hunt outlined a package of reforms aimed at addressing the woes of the UK’s stock market. Rosie Carr has written in Investors’ Chronicle that the reforms, with their focus on promoting growth and reversing the slump in UK listings, are a step in the right direction when it comes to loosening the grip that risk management currently has on the market. Risk warnings encourage companies to hold on to their capital while also scaring away investors and inhibiting growth. Lightening the burden of regulations is key to unlocking a better funding environment for start-ups and Carr writes that Hunt’s speech succeeds in placing this aim at the heart of the reform package. And, rather than simply improving returns for investors, this ambition of reinvigorating the UK capital market is vital for a strong job market, favourable tax revenues and a growing economy.

One in six asset managers expected to disappear by 2027 – PwC survey

In their Global Asset and Wealth Management survey, PwC have found that one in six (or 16%) asset management firms may no longer exist in four years as inflation, market uncertainties and high interest rates are amping up the pressure on the industry. According to Investment Week, nearly three quarters (or 73%) of asset managers have reported considering strategic consolidation with another asset manager in the near future to mitigate risk and build market share. Indeed, throughout 2022, global assets under management fell by nearly 10%, marking the largest decline in a decade. The survey also offers insight into other ways the asset management industry may be expected to change over the coming years. Private markets will continue to grow and are expected to make up half of revenues for asset managers by 2027, up from 38% in 2020. Furthermore, the rapid advancement of technology and rise of AI have already prompted many firms to adopt big data, blockchain and AI tools to improve their client experiences and help secure future-proof status. The emergence of a new breed of investment firms may already be under way.

Companies with diverse boards more vulnerable to activist assaults

New research carried out by the Rotterdam School of Management (RSM) has found that boards with more female and ethnic minority directors attract higher levels of activist attacks from hedge funds. The study, which examined US hedge fund corporations over a nine-year period, revealed that businesses who experience governance issues and have highly diverse boards are almost three times more likely to be targeted by activists, and almost four times more likely to face activist campaigns if they are going through performance issues. Dr Emilio Marti, an assistant professor at RSM, explained that while demographically diverse boards are more effective under normal circumstances, diverse boards result in slower decision-making and weaker unity – both of which benefit activist hedge funds, as they can get a head start in mobilizing other shareholders and making alliances with board members.

An ESG loophole has helped drive billions into oil companies

According to Matt Levine at Bloomberg, most people identify oil companies with carbon emissions (reasonably so) and ESG-focused fund managers as unlikely investors in such companies. Meanwhile, if these same people pictured an investment firm they would probably imagine rows of desks, workers on their computers, and carbon emissions nowhere to be seen. Levine suggests that the checklist of an ESG fund manager looks something like this: oil companies = bad, so no, don’t buy their bonds. Investment firms = fine, yes, not a problem. An investment firm’s business is to own securities, with real assets, such as pipelines or oil wells, as underlying securities. But it’s just an investment firm – who said anything about carbon emissions? This complex web of financial structures is exactly how Saudi Aramco became the unlikely beneficiary of funds earmarked for sustainable investments. For climate activists, the fact that major carbon emitters and ESG focused funds are somehow ending up together exposes a major loophole.; moreover, as Levine points out, this loophole is open to absolutely any company in the world whether it is digging coal or drilling oil.

And finally… the great accountant shortage shows up in financial statements 

The effect of fewer people pursuing degrees in accounting and entering the field is starting to make its way into financial reporting. In recent months, U.S.-listed companies such as car-parts provider Advance Auto Parts, electric-air-taxi firm Joby Aviation and German biotech company Evotec have all disclosed efforts to address material weaknesses which were due, in part, to a lack of accounting staff. Nearly 600 U.S.-listed companies of a total 7,359 reported material weaknesses related to personnel this year, typically in accounting or information technology, marking a 41% increase from the 2019 period, according to a review of filings by research firm Bedrock AI. One solution for companies is to offer accountants more lucrative pay packages since the profession has long been viewed as underpaid and undervalued compared with a career in banking. Whether management likes it or not, higher salaries for in-house accountants may be on the horizon.

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