Explore how investors' approaches are changing...
Fidelity notes investor shift toward more active strategies
One of the constant investor narratives of recent years has been the rise and rise of passives, but that looks to be changing, with large investors beginning to turn away from traditional passive investments.
This is the stark message from the latest Fidelity Global Institutional Investor Survey. It reveals that over the next six years institutional investors expect to shift their portfolios toward more active strategies and smart beta products – all at the expense of traditional passives.
Looking ahead to 2025, when asked to share their portfolio construction strategies, institutions with $1 bn or more in assets generally expect to make the most significant changes to their asset allocation, including increasing investments in active, non-traditional passive, alternatives and unconstrained strategies and derivatives.
In particular, 41 percent of respondents from these large institutions say they anticipate increasing their allocations to actively managed strategies by 2025. Twenty-five percent of large investors also say they would increase their exposure to non-traditional passive or factor-based funds. Only 5 percent indicate they would increase the size of their traditional passive position.
The Fidelity survey finds that institutions are pursuing different portfolio construction approaches partly because of their expectations for the future. Institutional investors say that when considering their investment portfolios, their top concern is a low-return environment (21 percent), closely followed by volatility (17 percent).
‘Institutions realize that in the long term, market activity may no longer be enough to generate returns, so they have to work smarter to reach their goals,’ says Jeff Mitchell, chief investment officer of Fidelity Institutional Asset Management, in a statement. ‘Institutions are restructuring their portfolios to reflect this changing investment ecosystem, whether by increasing allocations to certain investment styles or asset classes, or by embracing new investment strategies.’
The survey also finds that institutions recognize the influence of technology on the markets and portfolio strategies, with 62 percent expecting advances in technology – such as high-frequency trading algorithms and quantitative investment strategies – to make the markets more efficient.
‘Technology continues to fundamentally change the industry and how we think about investing,’ says Judy Marlinski, president of Fidelity Institutional Asset Management. ‘We encourage institutions to collaborate with their investment partners – investors and asset managers alike can work to foster a culture of innovation in investing, and support it by developing appropriate processes for due diligence and monitoring results.’
She adds that the changes revealed in the survey will be the trend among all sizes of investors: ‘Larger institutions may be leading the trend toward restructuring their portfolios, but we expect these trends to be adopted more broadly throughout the wealth management industry.’
The survey included responses from 905 institutional investors in 25 countries.
In Palo Alto, some of the world’s most innovative companies are preparing for a slate of new IR challenges
More than 90 IR professionals gathered in sunny California at the end of March for the IR Magazine Think Tank – West Coast. It had been six months since IR Magazine’s previous think tank in the area, and there was a sense from the conversation this time round that several global megatrends – Mifid II, ESG and blockchain – are having a much more tangible effect on the IR community than in the past.
By grasping the implications of these trends, IR has an opportunity to provide greater strategic value to the C-suite and the board, according to one of the think tank’s panels. Here we recap some key highlights from the event.
The day’s discussions underscored how North American attitudes toward Mifid II are changing. Six months earlier, the prevailing opinion was one of slight skepticism, with most IR professionals favoring a wait-and-see approach. One buy-side panelist then even said: ‘It’s a sell-side problem, not an IR problem.’
But at the latest gathering we learned that several IROs have changed their behavior since the European regulation came into effect on January 3, 2018. Although this is not yet a result of Mifid II having an impact on North America directly, it’s informed by how the relationship between issuers and the sell side is changing in Europe – and an anticipation that a similar change could occur on a more global scale. One small-cap IRO said she was proactively preparing for a decrease in analyst coverage. ‘I know decreased analyst coverage is coming so I’m trying to expand my base as it stands,’ she said. The value of the sell side is particularly apparent at small caps, where resources are scarce and IR teams may not have the targeting and surveillance tools that large and mid-caps take for granted, she explained.
Conversely, two large-cap IROs felt sell-side contraction would have a net positive result for their company by filtering out analysts who produce low-quality research and currently take up a lot of their time. Although they were hopeful Mifid II wouldn’t mean fewer opportunities to market in Europe, there was agreement that more diligence will be required from IR professionals to ensure they’re partnering with the right brokers and getting in front of the right investors.
During a lively panel discussion featuring an exchange-traded fund (ETF) portfolio manager, a managing director of a large passive investor and an investment analyst at an active manager, attendees were cautioned to start thinking about material ESG risks as part of their mandate. ‘ESG is a risk, not a reward,’ said the analyst at the active manager. ‘We’re not focusing on this because it’s a nice-to-have or an add-on.’
All three panelists implored audience members to think more carefully about the ESG risks inherent to their business. The panel discussed the case of a 3D printing company and how the use of plastic, where it is sourced and how it is processed would be an example of a material ESG risk inherent to the firm’s products.
The threat of losing a vote during proxy season is very real if ESG risks aren’t addressed. The active manager explained that his firm had voted against more than 60 percent of executive compensation packages in the US last year, and the passive manager warned that ‘just because we can’t sell, it doesn’t mean we go away.’
Although assessing risks is paramount, the panel also provided tips about how to improve ESG disclosure. When it comes to environmental risk disclosure, the Sustainability Accounting Standards Board has the best existing framework to explore, given that there is a different framework for each industry, according to the panel. In terms of social and governance issues, meanwhile, the panel pointed to the need for improved proxy statements. On a governance topic such as board diversity, for instance, there is a desire to see more than just gender and ethnicity – a board’s skills, educational background, professional experience and international experience are all as relevant in countering groupthink.
But there was one disclosure the panel had very little time for: the CEO pay ratio. ‘It’s just math,’ one panelist said to applause from the audience.
When it comes to shareholder engagement, you can’t have too much of a good thing – but you can certainly have too much of an average thing. Amid growing calls for more engagement throughout the year, IR, buy-side and communications panelists all noted that there’s no point reaching out to your investor base if you don’t have anything new to say.
The passive manager from the buy-side panel asked every audience member to check investors’ websites to review their positions before sending an email or making a call. It does more harm than good to reach out with a boilerplate message asking for a meeting, she added. One IR professional explained how she regularly looks for ways to refresh her company’s story or highlight new aspects of it. Following on from the earlier ESG conversation, she pointed to social and governance issues as good ways to highlight something new or spark a conversation with an investor. This is particularly helpful when an issuer’s practices are at odds with an investor’s position on a specific issue: both buy-siders and IROs agreed that was the optimal time to set up a meeting.
IR people should also not take it personally if they contact an investor and don’t hear anything back, another panelist pointed out. Investors have been inundated with requests for meetings in recent years so if they don’t get back to you, that’s normally a good sign, he suggested. Blockchain is being tested.
Who really knows a Bitcoin from blockchain, or an initial coin offering from a general ledger? Although the origins of blockchain are mysterious (the identity of its creator is unknown) and murky (it was first used primarily to purchase illegal products on the dark web), it continues to grow in popularity.
The vision of blockchain is to have a financial system that is not managed by third-party institutions such as banks, financial advisers and transfer agents, and is therefore more transparent and accessible. As regulators and the general public continue to grapple with what the technology is and whether it is a flash in the pan, Banco Santander decided last year to run its AGM using blockchain technology. It will do so again this year and, according to one panelist, there is growing interest from other issuers.
Northern Californian IR community discusses new challenges and opportunities
In late September, 60 of the best and brightest of the IR community around San Francisco and Silicon Valley gathered at the IR Magazine Think Tank – West Coast II.
When we brought this audience together in March 2019, there were the first substantive signs of the mega-trends of ESG and Mifid II really affecting how people were thinking about their IR programs. How would the audience respond over the following six months and what else was on their minds by September?
One of the expected consequences of Mifid II is that issuers and investors will begin to engage directly, cutting out the sell side. While there were several people in the room – representing both issuers and investors – who said they are more open to direct engagement, there was also an acknowledgement of the value the sell side provides.
Mary Turnbull, senior vice president of corporate access at Raymond James & Associates, said the number of roadshows and conferences her firm is working on this year will be on par with 2017’s numbers, which were the highest the firm had seen. So while direct engagement may be more common, at this early stage it may be the case that it is on top of existing broker-led engagement, rather than at the expense of it.
Turnbull added that Mifid II is prompting a more fundamental partnership between the brokers and IROs. For instance, when institutions have a policy of not paying for corporate access, Raymond James will still include them in a roadshow, but will also ask the company to meet with paying prospects it thinks will be of value. ‘There’s a lot more dialogue to be had,’ Turnbull said.
She pointed out that IROs will get much more value out of corporate access if they share their target list in advance. ‘Everyone uses targeting software, and that’s the first line in targeting. But once you’ve identified the firm you’d like to meet, how do you know who you want to meet with?’ she asked. ‘Should you meet with the portfolio manager, the analyst or both? If we get that list upfront, we can provide real-time feedback and have better conversations.’
On the topic of who to meet with at an investor, PayPal’s head of IR Gabrielle Rabinovitch suggested looking beyond your traditional sector base. ‘If you’re taking the time to meet with [an investor], ask to meet with multiple portfolio managers,’ she said. ‘There might be some overlaps in terms of their investment thesis. At the larger long-onlys, you’re seeing a lot of rotation and a lot of analysts moving around, so it’s beneficial to see a large group when you go. You want to think about targeting within institutional investors, not just across institutional investors.’
Dan Romito, global head of investor analytics at Nasdaq, agreed that companies should broaden the range of sector specialists they target. Mifid II and the increase of assets flowing into passive funds is creating a ‘paradigm shift’ in investor engagement, he said. ‘There are a lot of best practices that are established when you ignore the old paradigm: there isn’t one new paradigm that has come in its place, there’s a whole series of new paradigms.’
In addition to targeting a broader range of investors outside of your traditional industry sector, Romito advocated for direct engagement and suggested instituting ‘Dial for Dollars Friday’.
‘The days of sitting back and allowing capital to come to you are gone,’ he said. ‘There are just too few people covering too many stocks. Reach out to investors and give them the value proposition. And don’t be afraid if there’s no interest.’
Perhaps the most quotable line from the day was also told to Romito while he moderated his table discussion about investor engagement. ‘Don’t be a hedge fund bigot, be a turnover bigot,’ the person at his table told him. ‘There’s nothing wrong with meeting with hedge funds. It just depends on the individual. If the fund is long-term focused and stays in a stock for a long time, there’s nothing wrong with engaging with it.’
In a later session, Megan Capay, corporate relations at Surveyor Capital, relayed the challenges her firm faces as a hedge fund. She said sometimes she’ll hear that corporate access brokers will receive a target list from issuers, and her firm will have been blacklisted. In these situations, she has called for more information from the issuer about why that is. ‘Have you had a bad experience years ago? Do you just not want to meet hedge funds? Having that dialogue would be helpful going forward,’ she said.
Capay also noted that a quirky impact of Mifid II is that issuers should expect to see the ratio of hedge funds to long-only firms at roadshows tilt toward more hedge funds because they will be willing to pay for corporate access, unlike some large institutions.
ESG has often been cited as a consequence of assets flowing into passive funds and, during an interactive session where attendees were asked to write down their biggest IR challenge, more than half wrote down a passive-related concern. During a later panel, however, Serena Perin Vinton, senior vice president and portfolio manager at Franklin Templeton Investments, outlined how active managers are also paying attention to ESG in a meaningful way.
Her firm is a signatory to the Principles for Responsible Investment (PRI), which she said places greater scrutiny on Franklin Templeton’s ESG integration. As a result, the firm has appointed an ESG ambassador and director of ESG research for every investment division it has. The firm’s approach is screening for ESG, not SRI, she said, so ‘it’s not precluding us from making any investments, but it’s helping us assess fundamental risk.’
Perin Vinton also spoke about the limitations of the ESG data currently available to investors. Franklin Templeton subscribes to MSCI and Sustainalytics, she said, but is not wholly satisfied with either service. For instance, she feels there is a cap size bias – where large caps receive a more favorable rating because they have more resources to put toward ESG disclosure. As a result of this, Franklin Templeton aggregates the data it receives from MSCI and Sustainlytics and then overlays its own research to reach a conclusion.
Perin Vinton also praised the Sustainability Accounting Standards Board’s (SASB) reporting framework, which is attempting to provide a degree of sector-specific standardization of ESG data. Earlier in the day, Anton Gorodniuk, financials sector analyst at SASB, outlined the balancing act ESG data aggregators face. ‘Everybody wants to tell a unique company story, but there is a need for investors to be able to compare companies,’ he explained. ‘That is the challenge and we’re trying to think about how to balance it.’
Several of the sessions during the day underscored the value of strategic IR, including in reporting into the CEO and board. But perhaps the most arresting example came in a discussion about crisis management, during which attendees talked about how the number of risks to public companies continues to grow. Activism, short-sellers, data breaches, CEO departures, sexual misconduct… the list of emerging risks goes on.
The group agreed that IR has an opportunity to take the lead in crisis management if there isn’t already a concrete plan in place. ‘Know who should be at the table and have them know they’re expected to be at the table before a crisis occurs,’ said Lisa Hartman, president-elect of the NIRI San Francisco chapter. ‘If you don’t have a crisis committee in place, establish one. It’s a good way for IROs to be seen as internal leaders.’
Hartman also suggested tracking the types of crises other companies are facing by regularly following the news. By doing this, she said, IROs can think about how they would respond and who they would talk to if a similar situation arose at their own company.
