IR Weekly – Monday 18th May

Welcome to FTI Consulting’s IR Weekly newsletter.

In the IR Weekly today, we look at: what investors really want from Covid-19 era company reporting; how the asset management world’s ‘Trillion Dollar Club’ retains its dominance; why Ocado’s online success equals big executive bonuses for Tesco; why companies might want to put share buybacks on the back burner; how the Covid-19 pandemic could impact shareholder returns; and what Theranos’ cautionary tale still has to teach us during the pandemic.

This week’s news

Meet the fund manager

Last week the IR Society hosted a webinar with key investors in the industry, including Fidelity, GLG and Wellington, who provided views on best practice and what they would like to see from company communications, particularly during the Covid-19 crisis. Transparency in company reporting remains crucial for investors, especially around issues of balance sheet strength and liquidity, in tandem with ensuring materials such as webinar replay functions and transcripts are readily available. Furthermore, the impact of Covid-19 on investment activity was discussed, with the interesting takeaway that the virus actually offers an opportunity for investors to take advantage of the situation. Similarly, ESG investment criteria continues to be paramount for investors, particularly during this time when factors such as how companies treat their employees will be highly scrutinised.

The tightening grip of the trillion-dollar club

The Financial Times reported that during the recent market correction, multi-trillion dollar asset managers have tightened their hold on the investment industry as jittery investors accelerated their migration towards large, low-cost fund groups. According to analysis from research group Flowspring, the recent trend of concentrating assets in the hands of the largest investment managers such as BlackRock, Vanguard, Fidelity and State Street spiked at a significant rate in the first three months of the year. Currently, the largest one per cent of investment groups manage 61 per cent of total industry assets, which is 243 times that of the bottom 50 per cent, compared with 105 times in 2010. Comments from Warren Miller, chief executive of Flowspring, indicate that investors are flocking to passive and low-cost providers as a result of reconsidering portfolios and executing decisions they have been putting off for years.

Tesco’s Ocado deliverance

While Covid-19 has prompted many short-term adjustments to executive pay, Tesco has gone against trend by reporting an increase in executive renumeration, by changing its incentive metrics mid-cycle. City AM reported that Tesco’s decision to remove Ocado as a benchmark competitor led to a sizeable boost in executive bonuses. The decision was taken last year by Tesco’s renumeration committee to remove Ocado as a competitor on the grounds that it was ‘pursuing a technology strategy.’ Before the removal of Ocado Tesco underperformed its rivals by 4.2% over three years, while after the change it outperformed them by 3.3%. The adjustment netted outgoing Chief Executive Dave Lewis £1.6M in shares.

Buybackers beware

As companies in all sectors re-evaluate their outlook for the rest of 2020 and beyond, The Times’ Financial Editor Patrick Hosking has a stark warning for companies looking towards share buybacks as a solution: it’s pie in the sky. Hosking points to recent attempts at share buybacks by Foxtons, Aston Martin Lagonda, and Just Eat Takeaway as noticeably out of step with investor sentiments in a time of crisis. Hosking explains that investors were generally already weary of company enthusiasm for buybacks pre-Covid, and now are beginning to see them as reckless, at a time when cash is more precious than ever. Hosking argues that buybacks can form an effective strategy, pointing to Auto Trader as an example with its strong shareholder relationship, but that in times of crisis, the dangers of doing so on a thin equity and liquidity margin are important to be aware of.

Covid-19 cuts into global dividends

Fund Manager Janus Henderson today gave a stark indication of the total cost of the Covid-19 pandemic on shareholder returns, predicting that close to $500bn could be wiped from the value of dividends globally, the Financial Times reports. Janus Henderson’s report stated that even a best case scenario would see a 15% decline in global dividend value, or around $213bn, however this only includes cuts already announced, or predicted to be announced. The wide range of the potential impact is due to the outlook for the crisis still being unclear, with a delayed impact on dividend payments, and some regional variance. North America is likely to be less impacted, due to its higher proportion of technology stocks, and a preference to cancel share buybacks before postponing dividends. This follows the pattern of previous recessions: during the 2008 financial crisis global dividend value fell by 30%.

And finally… lessons from Theranos

Theranos has been described as an object lesson in how excitable investors, slick marketing and sheer greed can collide. Bloomberg reported that lessons from the blockbuster fraud trail of Elizabeth Holmes and Theranos Inc may have shocking relevance for the Covid-19 environment. Tyler Schultz, a former employee of the start-up, warned that Theranos would be “thriving” during the current climate as a result of large-scale health needs, the potential for lucrative financial gain and corner cutting by regulators, particularly as new rapid tests suggest it may take a simple finger-prick of blood to detect the novel coronavirus. With increasing burden being placed on customers to make sense of technical information, if a consensus emerges that antibodies do in fact confer a degree of immunity, this market holds dangerous potential for fraud, particularly as regulators have been slow to wake up to the risks of fraud as of late.

Upcoming conferences

Wolfe Research 19th Annual Global Transportation Conference (virtual) (19-20 May)

J.P. Morgan European Technology, Media & Telecoms CEO Conference (virtual) (19-20 May)