Elizabeth Judd, Writer
While combing through ownership lists before a management trip to Dublin, David Carey, Senior Vice President of Capital Markets at ARC Resources Ltd., happened upon the name of an Irish institutional investor he hadn’t personally met. Carey phoned to say management would be coming to town, and he’d be delighted to set up a meeting. “The portfolio manager said, ‘Thanks for the call, but we’re strictly a quantitative fund. Meeting with management just confuses the issue,’” laughs Carey.
Targeting investors is a critical element of an IR program, but the outcome of any individual call or face-to-face meeting is almost impossible to predict. Richard Downey, Vice President of Investor and Corporate Relations at Agrium Inc., raises a similar issue: “The jury is out on how much payoff you get with targeting. There are investors who come into a stock barely having talked to an IR professional, and others contact you directly. So there’s only a subset of investors on whom targeting might have an influence.”
He continues: “I think targeting is worthwhile, but you don’t always have a sense of how good a job you’ve done.”
Corporate Access Through Brokers
Over the past six months, the U.K. Financial Services Authority (FSA) has signaled that it is scrutinizing the services client commissions are funding and how these payments are made. The FSA strongly suggests that setting up corporate meetings is not a permitted research service and so should not be paid for with clients’ commission dollars.
Following the initial FSA report, the Financial Times ran a series of articles revealing that some investment banks charged institutional investors $20,000 or more for an hour meeting with a corporate CEO. Worse still, many of these executives had no idea that their time was being bartered in this way.
After these stories broke, Carey contacted the investment banks and brokers he regularly works with and found that the practice of paying for corporate meetings is, fortunately, quite rare. “It sits badly with me that there are portfolio managers who think the only way they can get a meeting with my management team is by paying a broker to do it,” he says. “That’s just not the case. They can call me up, and we’ll have a meeting.”
Even if outright payments for meetings with management are the exception not the rule, the controversy is prompting IROs to consider which investors they’re seeing – and who’s arranging these meetings.
When it comes to having investment banks and brokers handle the logistics of non-deal roadshows, Carey has been favourably impressed: “For the most part, I’ve been very happy with the quality of the meetings I’m getting in the different cities based on letting the brokerage houses take the lead.”
Carey says that he shifts non-deal roadshows among the 18 analysts covering ARC Resources. “In any of the major cities, 50% of the accounts are the same accounts, and it doesn’t matter who’s taking me,” he observes.
Although Carey informs investment dealers of names he’d particularly like to see, he generally lets the firms put together an itinerary. “Most sales desks know a lot more about who’s buying in any particular market than I do,” he says. “There are some really good salespeople out there who have the portfolio managers’ ears. If you can market in cities with top-notch salespeople, you’ll have really good meetings.”
Dmitry Kushnir, Corporate Director of Investor Relations at Agnico-Eagle Mines Limited, has a much different take on broker marketing. He cautions that his criticisms are specific to the gold industry, a sector decimated over the past 18 months by falling prices. Because of problems within the sector, industry-specific funds no longer are the shining prospects they once were.
With that proviso, he underscores the inherent conflict of interest in allowing brokers to organize non-deal roadshows. “If we take New York City as an example, I bet there are dozens of accounts that we should be seeing that we’d never see with a broker.”
Greg Waller, Vice President of Investor Relations at Vancouver-based Teck Resources, paints a portrait of broker-organized roadshows that falls somewhere between these two extremes. “We put a lot of work into identifying the targets we want to see, rather than allowing the investment dealers to come up with the lists of names for us to see in a particular jurisdiction,” he says. “We recognize that investment dealers have their best clients and we have to accommodate them in the luncheon meetings. But then we try to save the one-on-one meetings for the more prime targets off our list.”
DIY Targeting
Although most IROs rely on surveillance firms, consultants, and brokers to aid in targeting, they also generate prospects on their own.
Whenever Carey begins planning a non-deal roadshow, he scans his notes, scouting names of investors who have invited management to visit. Next, he looks at his company’s peers, considering whether their investors are different from his.
Downey tries to assess not just his direct peer group but also those companies within the broader industry, seeing which are underweighted in Agrium. He also scrutinizes those large investors on the shareholder roster who own just a small percentage of his company. In addition, he reviews data from a stock surveillance firm to identify other investors who might be prospective buyers.
Kushnir is a firm believer that IROs should trust their own instincts when it comes to targeting. “From a corporate targeting standpoint,” he says, “I’ve always thought there’s no blueprint.” For this reason, he is wary of companies that purchase targeting models from third parties. “If the model is too complicated and you can’t easily understand it, it’s not worth all that much,” he says.
Adrian Rusling, Partner at Phoenix-IR in Brussels, also expresses concern that quantitative targeting can lead an IRO astray. “Why do so many IROs put so much faith in quantitative targeting, which is basically back testing?” he asks. Given that 13-Fs are filed 45 days after a quarter ends, the data is stale and don’t accurately reflect current buying trends.
Casting a Wider Net
Whether an IRO uses quantitative targeting models or lets brokers arrange the roadshows, too many public companies tend to chase the exact same prospects. “If you asked 10 IROs for a list of the top 10 targets, there’s going to be a huge level of overlap,” says Rusling. “People throw out the same names, but there are plenty of people out there running concentrated portfolios that no one thinks about all that much.”
For many Canadian companies, one of the most compelling ways to think outside the targeting box is to visit investors in different locales.
Brian McNulty, Strategic Advisor for Steel Rose Communications in Vancouver, and former IRO at both Intrawest Corp. and Canadian Airlines International, believes that planning a non-deal roadshow to a completely different region is an excellent idea. “Geographically, IROs can be a little more creative and not just go to Toronto, Montreal, and Vancouver,” he says. “It takes more effort, but there are investors off the beaten track who will appreciate a meeting.”
Waller spends the bulk of time allotted for roadshows in North America, but also travels to Europe and Asia at least once a year for marketing purposes. He includes sovereign wealth funds on Teck’s targeting list -- a strategy that makes sense given the fact that China Investment Corp. (CIC) bought a 17% stake in 2009, while Norges Bank, the SWF of Norway, owns nearly 1%.
“We don’t target SWFs in particular,” says Waller. “But when there’s a sovereign wealth fund in a region we’re visiting, we’ll probably put them on the list as another institutional investor to see.”
One problem with taking a more creative approach to targeting is that the additional effort is time consuming. Agrium’s Downey estimates that he annually spends 2%-4% of time strategizing about which investment targets to approach. However, even this relatively modest commitment decreases when other corporate needs arise. In the past year, for instance, Agrium has not focused on targeting at all because the company has been coping with an activist shareholder that has diverted both IR time and resources.
Kushnir also laments spending too little time creatively targeting investors. “We have 25 brokers and no less than a dozen conferences we do each year,” he says. “We’ve over-brokered and over-conferenced.”
Targeting is labour intensive, the payoffs are imprecise, and there are countless third parties eager to take the burden off an IRO’s hands. That said, almost everyone would agree that a company’s active outreach to investors, both existing and potential, is absolutely central to the IR function. Kushnir concludes on this pithy note: “If you don’t have the ability to come up with your own approach to targeting, you probably don’t have the right IRO in place.”