Elizabeth Judd, Writer
In early February, in a move that raises some profound questions about the integrity of ‘independent’ research, the U.S. Justice Department sued Standard & Poor’s for ignoring its own bond-rating standards. In addition, the new rounds of layoffs at brokerage houses just keep coming, with the remaining analysts picking up a larger workload.
IROs are keenly aware of the sea changes taking place in investment research. As Jonathan Gould, Director of Investor Relations at Enbridge Inc., puts it: “The days of the highly paid, highly knowledgeable superstar analyst are over. The coverage now is much thinner.”
Even with these changes, most IROs feel that maintaining strong relationships with the analyst community is worthwhile.
“I’d say analyst coverage is just as important as it’s always been. It’s really the only source of arms’ length, third-party, unbiased opinions out there,” says Meghan Brown, Director of Investor Relations at Canaco Resources. (Since this article was written, Meghan Brown has moved to Endeavour Silver Corp. as the Director of Investor Relations).
Cindy Burnett, Vice President of Investor Relations and Communications at Capstone Mining Corp., agrees. She estimates that 75% of her job consists of dealing with analysts and investors, and half of that (35%-40%) is spent communicating with analysts.
“Analyst research is as important as ever,” says Burnett. She characterizes the 20 analysts covering Capstone – and then the numerous individuals on the sales desks at the brokerage firms where these analysts work – as a huge cadre of people “telling my story every day.” Analysts are irreplaceable, she says, because “as an IR officer, I could never hope to hire a staff that large.”
Coverage: The New Realities
One sign of changes afoot in the analyst community is the number of individuals fleeing the profession. After the 2008-2009 financial downturn, CIRI “got a lot of calls from analysts looking for opportunities in IR,” says CIRI President and CEO Yvette Lokker.
Malcolm White, Portfolio Manager at Signature Global Advisors in Toronto, has observed the same phenomenon: “Analysts are under enormous pressure. To save costs, they might be covering double the companies they once were.” He continues: “Research is at risk of becoming a commodity. There’s enormous quantities of research but the quality can be questionable.” White is also concerned about the “noise” generated by the welter of analysts competing for attention.
At the same time, White points out that the buy-side is changing, too. Given the rise of passive investors, fewer portfolio managers are interested in meeting issuers face to face. “It’s a shrinking list of critical clients with material assets under management that care about active dialogue with the issuers,” he notes.
Because of this radically different investment landscape, White is experimenting with contacting IROs personally. Going forward, he hopes that both issuers and investors will uncover new ways of interacting that don’t necessarily require sell-side input. “IROs need to do more deep thought in terms of how to match themselves with the best possible investors,” he says. “And large investors like ourselves need to outreach and do the proper introductions.”
Julie Taylor, Director of Investor Relations at New Gold Inc. in Toronto, makes some similar observations. She points out that given the rise of the eTrades of the world, investors are relying less on investment banks and sell-side analysts for basic information on public companies. “From our point of view, we’re telling the same story. But on the other side of the coin, investors – retail or institutional – have a much easier job getting information.”
She continues: “People know us, our management, our quality, and results. We have a good core of analysts and we’re happy with the level of coverage we have.” Recently, however, she’s increased her efforts to make sure the buy-side is using investor days and site tours to gain the same quality of information as the sell-side: “We’re trying to keep them in the loop on everything.”
Last year, Enbridge’s Gould began engaging in direct outreach to investors in order to introduce his firm’s new CEO. “Lo and behold, we found out that it wasn’t that hard,” he says. “Investors were happy to do it a) for the relationships, and b) because they didn’t owe anybody money – they didn’t have to pay anyone commissions for our coming around.”
Although Enbridge has no immediate plans to plunge into direct investor marketing, he says: “We found that the old model everyone always followed isn’t the only way.”
Courting Analysts
Getting analyst coverage can be something of a monomania for IROs at smaller companies for no other reason than it’s often so difficult to do.
Brown points out that Canaco had just one analyst covering her company when she joined two years ago and increasing that number was part of her IR mandate. (Today, three analysts cover the Vancouver-based mineral exploration company.)
“There are many juniors that can’t for their life get analyst coverage from a bank or brokerage house because they don’t have a compelling investment model,” says Brown. She points out that size shouldn’t condemn a company to analyst neglect; a mining company with a really intriguing discovery should be able to attract attention even if its market cap is tiny.
But how, precisely, can IROs at unknown companies attract sell-side attention? “An IRO might have to cold-call analysts,” says Brown. “The analysts may have never heard of the company. And that’s when IR is a sales job. It may involve multiple meetings and presentations to the analyst and often a site visit.”
New Gold’s Taylor says that the best way to attract analyst coverage is to develop relationships: “We pride ourselves on meeting guidance and developing trust.” Taylor also emphasizes that fostering relationships among analysts and key members of the management team is a very good idea.
Believe it or not, having a wealth of coverage has its challenges, too. Gould frankly acknowledges that 15 analysts covering Enbridge doesn’t spark any deeper a set of insights into his company’s outlook than a handful of skilled interpreters could provide. “There’s a lot of overlap,” he says. “We’ve got guys who don’t add much value at all but are doing the coverage as part of a mandate from their bank to broaden their relationship with us with an eye on participating in future capital market opportunities.”
Independent Research: Will It Ever Catch On?
When Taylor handled IR for Western Goldfields, one of seven junior mining companies that eventually became New Gold, the company had no analyst coverage whatsoever. As a first step to getting that coverage, her former employer engaged Toronto-based eResearch to write a research report on the company. Although Western Goldfields purchased the coverage, Taylor points out that there was no guarantee the company would receive a ‘buy’ rating.
Taylor’s experience points to one of the underlying truths in paid-for research; it may not be a company’s first choice for attracting attention, but it’s better than operating in a news vacuum.
Due to the natural skepticism surrounding issuer-paid research, some erstwhile sell-side analysts have opened their own shops, offering independent research that institutional investors buy instead. Gordon Gee & Associates is a case in point. A long-time sell-side analyst covering the oil and gas sector at RBC Capital Markets, Gee has spent the last 18 months doing his own brand of research for large institutional investors.
As a traditional sell-side analyst, Gee objected to “writing notes when there wasn’t a lot to say.” He now focuses on larger thematic pieces, in which he can tackle issues in sufficient depth.
Competing against sell-side research provided as part of an overall client package is challenging, admits Gee. And yet he has identified clients who represent large pools of capital in Canada and the U.S. and who see the value of his approach. “We don’t think it’s our job to tell a company’s story; it’s our job to analyze a company’s story. And there’s a big difference,” says Gee.
Michael Durose spent 15 years as a sell-side research analyst before founding Mining Research Group a year ago. He sees many inherent problems in the existing research model and so is trying to provide in-depth mining research directly to institutions. So far, too few funds have been willing to pay for unbundled and independent research.
“The traditional capital market model is changing and the integrity of the capital markets has blown apart. No one trusts what’s coming into the email boxes. And so if you don’t rely on that, you have to do your own work,” says Durose.
“The fundamentals of research really matter but there’s a lack of trust in the process,” concludes Durose. Observers from public companies, the buy-side, and independent research firms all seem to agree that while research remains important, the current model will almost certainly give way to something new, different, and for now difficult to imagine.