IR Monitor – 1st March 2021

This week’s news

Small investors call on Treasury to enforce the P in IPO

As numerous multinational brands prepare to go public, the flotation scene is a flurry of activity. Investors are cash-rich and seeking opportunity, while brokers and bankers sense large fees on the horizon. Amid this excitement, however, are cries of foul-play from private investors, unlikely to be permitted to take part, as the likes of Cazoo and Deliveroo make their initial public offering. The Times has dug deeper into these complaints from the likes of Hargreaves Lansdown, questioning whether private investors should be encouraged and permitted to take part in all floats. Many IPOs in recent times have seen private investors side-lined, only able to purchase shares in new listings on the aftermarket, where prices dictate paying at least 20% more per share. For years, the excuse touted by debutants and their banking representatives was that it was simply too costly to open IPOs to private investors, intermediaries were too expensive and systems too lethargic. However, following years of technological innovation and systems upgrading, this defence no longer rings true. Private investors are therefore calling for action from the Treasury. Mooted solutions at present include policy committing would-be debutants to at least consider a retail offer. Many wish to see regulation go further, following the example of Hong Kong and Australia who enforce quotas, guaranteeing a percentage of shares are allocated to private investors.

UK plc finds itself under offer from abroad

Overseas buyers have pounced with sales of British businesses abroad seeing a significant uptick in the first months of 2021. In the opening two months of the year, close to £20 billion worth of sales were executed overseas, sparking fears that UK plc finds itself up for sale. Some of the nation’s most recognisable names and institutions find themselves under offer including RSA and the AA as the UK market offers value to those looking to buy. Investigating the causes behind this phenomenon, the Financial Times has placed emphasis on the relative cheapness of UK mid-cap stocks combined with the firepower of Private Equity and SPACs. Across the UK, many mid-caps find themselves undervalued, despite being well managed, with Brexit and the impact of the pandemic to blame. The UK finds itself at its lowest point in the past 20 years on a price to earnings basis compared to Europe and the US. With the UK now politically stable following Brexit and the vaccination effort promising a quicker return to normality, overseas investors are sensing immense value. With offers being placed on the table, boardrooms find themselves loathe to reject negotiations outright. In 2015 the UK witnessed over £20 billion worth of inbound M&A but, if the standard set by the first two months of the year continues, 2021 could easily challenge that record.

Stakeholders vs Shareholders – The great boardroom debate

The term ‘purpose’ has become a permanent fixture in the lexicon of the boardroom. Senior business leaders across the planet, in response to increasing pressure, have found themselves defining and then actioning a set reason for existing beyond profit. Pledges to make the world a better place and better serve the people within it are plentiful, from the World Economic Forum to the US Business Roundtable. Yet actions speak louder than words, and with many of the world’s most notable companies saying one thing on purpose and doing another, the Financial Times has posed the question of whether a stakeholder economy will ever triumph over a shareholder one. Sceptics believe the answer is no, their stance only emboldened by the recent actions of JP Morgan (which recently declined to convert itself to a public benefit corporation out of concern for its shareholders). Moreover, the sceptics also argue it is unlikely that a job in a corporation will meet most people’s need for purpose in their lives.

The long and short of short selling

Short selling comes with its fair share of risks, but academic evidence shows that it can have an overwhelmingly positive effect on capital markets, given its impact on the efficiency of security prices, its ability to increase liquidity and the benefits it brings to corporate governance. Generally, it is advisable for individual investors to avoid short selling as an offensive strategy: the gravitational pull of stocks is higher over time and the reward versus risk in short sales is asymmetric; if a short goes against you, losses are potentially unlimited. Additionally, asset managers, banks and (especially) the media remain critics of short selling, with widespread calls for greater restrictions on short sellers after the recent Game Stop hearings. However, as ZeroHedge has documented, short selling does have its benefits. Thanks to the dominance of passive over-active investing in today’s market, short selling provides an opportunity for those brave and educated enough to take on its risks along with its rewards.

Pandemic puts the spotlight on ESG practices

A recent webinar hosted by FTI Consulting’s Dublin office featured panellists from Schroders, Federated Hermes, BMO Global and Legal & General, with discussion centred on how the pandemic has placed companies under tougher scrutiny over ESG practices than ever. This means the 2021 AGM season is likely to see a number of pressure points around disclosure, engagement and whether remuneration is effectively balancing the interest of a company’s key stakeholders. The discussion highlighted how upcoming AGMs mean that the ‘G’ in ESG will become all the more important to investors, with greater diversity expected on boards and with more investors using scoring methodology than ever before. Increasing reliance on research providers such as ISS makes it vital that companies are aware of their perception by various research providers. In particular, midcap companies have a long way to go in terms of governance and management systems around ESG, and should be looking at measures such as implementing dedicated ESG committees to improve board oversight. The panel agreed that, ultimately, ESG is ever-evolving and policies need to be flexible and updated on a regular basis. While investors may be inhibited by the nature of a virtual AGM season, this remote nature will help investors gain better access to further-flung companies. Many investors are now pushing for a hybrid AGM model, with virtual sessions supported by a mechanism for shareholders to show up in person if their concerns warrant it. On remuneration, there was a general consensus that companies which have benefited from government funding or made redundancies during the pandemic should not be paying directors’ bonuses this season. This sentiment was echoed by £400 billion pension investor Fidelity, with The Times reporting that the firm has written to FTSE 350 companies, warning that boards will face investor revolts should they try to pay bonuses after using government schemes such as furlough without repaying the money. The letter emphasised that this is a “red-line policy”, which suggests this is likely to be a contentious annual meeting season.

And finally … Spot the Dog

Investors criticise and ridicule companies all the time. Twice a year the tables are turned. Bestinvest has published its biannual Spot the Dog report identifying 119 underperforming funds and Investment Week has highlighted some of the biggest dogs of the report. Invesco remains at the top of the list, with 11 funds valued at £9.2bn. Despite improvements since the last report, Invesco’s figure was still more than twice that of the next worst performer. JP Morgan made a notable appearance, jumping from 45th place to fifth as a result of the US Equity Income fund’s dividend mandate leaving the portfolio without technology stocks. However, it wasn’t the only weighty fund to be a dog, with the top ten funds totalling £23.2bn in assets under management. North American funds featured the highest proportion of dogs, with 26% of products qualifying. Some big names featured in the UK All Companies doghouse and pedigree lists, with Invesco UK Equity High Income, Jupiter UK Growth, Jupiter Growth & Income and Legal & General UK Special Situations all dogs.

Conferences

2 March: Industrial Technologies Conference 2021 – Berenberg 

4 March: Virtual Sustainability Conference – Canaccord Genuity

4 March: 2021 Shipping Summit – Deutsche Bank 

4 March: Evercore Payments and Fintech Innovators Forum – Evercore 

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