Field guide to investors
Stock surveillance, and more specifically shareholder ID, is key to companies facing shareholder proposals or upcoming merger votes as a way to strategically target proxy solicitation efforts. But it also has a place as a day-to-day tool to manage investor targeting.
Investor relations and corporate governance departments spend much of their time trying to get a good view of their actual and potential shareholder base, and gauge their opinions on a range of matters. Market intelligence firms say the task of identifying shareholders has three parts: accurate share register analysis, institutional background information and comparative peer investment analysis. With tens of thousands of institutional investors, and a flood of cross-border investment, IR teams may find it difficult to keep the players straight.
That’s why surveillance firms keep dossiers on the funds with such information as briefs on their investment strategy, top buys and sells, and peer ownership comparisons. ‘At the top level, it is sort of a who’s who of the capital markets,’ says Charles Hamlyn, business development director with London, Sydney and Hong Kong-based Orient Capital.
Mark Simms, CEO of London- and New York-based Capital Precision, says the investment profile is one part of a broad-based capital markets audit. Using proprietary research, his analysts examine a fund’s investment prospectus and its stated investment strategy and cross-reference that information with what is seen in the fund’s holdings. ‘We talk with the portfolio manager if required to get clarity and look at other sources,’ Simms adds.
The investment profiles, which have scores of data points, form the basis of some matchmaking. ‘From a corporate standpoint, our products are used to arrange meetings,’ says Peter Juhng, a senior partner with the market intelligence firm Illios Partners. ‘If you are planning a roadshow and have meeting requests, you can read up on the firms. You can generate unlimited profiles.’
The information helps identify less visible and accessible prospects. ‘Investor relations officers know their top investors very well,’ Hamlyn says. ‘If you are going on a roadshow, this may help target some institutions not in your top 20.’
There are many good reasons for companies to rely on broker-led investor targeting, but the resulting agenda may not always be desirable. Often, corporate access managers at the large brokers and investment banks who arrange meetings for company investor relations and governance teams favor their biggest fee-generating clients, such as hedge funds, that may be of little consequence, troublemakers or otherwise not essential for management to meet with in person.
A smart solution is to cross-reference the broker supplied list with that from the surveillance firm before finalizing meeting schedules. ‘It acts as a bit of a counterbalance to companies that otherwise are being closely guided into
a particular set of meetings,’ Hamlyn says. ‘The people making those introductions might have incentives around fees [from the most active traders].’
Preparation is key
Using surveillance to profile an investor also helps smooth meetings, and IROs are employing it to prepare executives. ‘The greatest encounter a CEO or CFO can have with an investor is one in which he actually knows what the investor wants to hear ahead of time. Are they interested in cash flow? Are they interested in margin expansion or are they interested in the top line?’ asks one IRO, speaking not for attribution. ‘So if you brief them before you go into each of those meetings with what the investor wants to get at, that creates a much tighter connection.’
So what do you actually get for your money? The basics of an investment profile include some fund history, holdings by markets, global offices, manager bios and source of funds whether pension fund, high net worth clientele or other derivation. Surveillance firms also tie profiles in with contact management software so corporates can track interaction with the investors.
Compiling the dossiers takes digging and patience. ‘There are a number of ways we get our data,’ Hamlyn says. ‘There are vendors that provide public ownership data. We also run analyses on a universe of 450 share registers. And absolutely, we conduct our own research and it is led by a former fund manager.’
A large number of investors see their strategy as proprietary and shun surveillance. ‘Hedge funds are harder,’ says Juhng. ‘Many are super-secretive, but our research team has good information and connections that open a lot of doors.’
Over time, surveillance firms are filling in the landscape. Orient Capital’s database, for example, is global and has been in the making for 20 years. Illios aims to get a profile for every institutional investor, and in most cases has holdings or a general background of the firm, Juhng says.
Contrary to their reputation, US portfolio managers are often the most open, Simms says: ‘It largely comes down to how we articulate why it is the information is being gathered. Once they understand management is trying to maximize the value of that investment, they are a bit more cooperative.’
Providers do contend with the problem of information overload and do highly edit the data presented to companies. Surveillance clients can also take control of the databases, and strip out the bits they want. ‘Your aim is to deliver neither more nor less than what the IRO or board is looking for,’ Hamlyn says. ‘You want to avoid heaping reams of data on them.’
IROs may find there is a logic to using advisers who are close to the market who can slash their administrative burden and provide a sounding board for targeting and profiling. ‘Because of the independence and empowerment of this type of data and because of the IR-specific focus,’ Hamlyn says. ‘I hope and think I can see a coming of age of this type of product.’