Dirk Lever, AltaCorp Capital Inc.
What’s Your Benchmark?
When Canadian oil and gas companies (or any others, for that matter) pitch institutional investors, their effectiveness depends in part on awareness of the mandates and benchmarks of the portfolio managers they meet. Are the portfolio managers long only, or can they short stocks? What is their investment time horizon, their style of investment (growth, opportunistic, contrarian, etc.) and, importantly, their benchmark? The first questions will help IROs understand how PMs invest, but the second question will help explain where they invest. IROs also should know the size of the portfolio managed to understand the relative importance of your company to the manager.
What’s The Competition?
Many portfolio managers have some sort of investment benchmark that they look to beat, and typically this is some form of index against which portfolio performance will be measured. Knowing the benchmark (or index) will also help you understand the scope of the portfolio manager’s investment universe. Increasingly, the benchmark is not just a ‘Canadian’ yardstick but encompasses a wider array of securities, including foreign ones. In fact, Canadian companies in such a benchmark may be few – representing either a drawback or an advantage for them.
Know Your Competition
Understanding the various benchmarks (and the companies within the various benchmarks) will help IROs better tailor presentations to the audience. This means knowing competitors and the environments in which they operate. Returning to the oil and gas sector as an example, if your company is predominantly a natural gas producer and the portfolio manager’s performance or compensation is benchmarked against a North American index, you will be wise to understand the key North American gas plays, the varying economics of each play, the relative valuations of the companies within these plays, technologies used, egress issues, and so on.
Be Prepared and Be Flexible
Understand that the portfolio managers you meet likely have a wide range of investment opportunities; your company is likely one of many they will evaluate. It may not be enough that your company can generate good returns, as the portfolio manager is likely thinking of relative returns, risk adjusted returns, portfolio concentration risks, political risks (even on a regional basis) and egress issues, among other issues. In today’s more global world, your company likely needs to be ‘relatively great’. It is amazing how many presenters hone their pitch but miss the nuances of questions asked. These give clues as to the portfolio manager’s concerns and areas of focus. Listen carefully and learn to be flexible – ready to adjust your presentation to suit the listener’s needs rather than your own.
Relative Size Matters
In this age of electronic trading platforms, trading costs have dropped significantly; a portfolio manager in Winnipeg can just as easily purchase a U.S. listed security as a Canadian listed security. Lines of demarcation are being blurred. This has allowed competitive investment landscapes to expand, along with average portfolio sizes. A portfolio manager sitting in Winnipeg is looking for the best returns possible and – again using an oil and gas example – this may mean a U.S. natural gas stock in the Permian Basin rather than a Canadian natural gas stock in the Western Canadian Sedimentary Basin. This type of example is valid for any industry.
Relative Performance Matters More
Since each portfolio manager is looking to beat a benchmark, understand not only the valuation of your business in relation to its immediate peers, but to other companies within the portfolio manager’s benchmark. It’s not enough to say that your stock is cheaper, look at the multiples; it’s necessary to understand why the differences exist and what catalyst would change the relative valuations. For portfolio managers to outperform the benchmark, they need to figure out how relative values will change with time and how to adjust their portfolios to take advantage of these changes. Portfolio managers who best discern the shifts will outperform.
What is Your Canadian Advantage?
As the investment world becomes more and more global in nature, the home base of a company’s operations becomes less and less relevant. For portfolio managers who can only invest in Canadian companies (a shrinking universe), the competitive landscape is comparatively smaller. However, investment mandates are shifting to meet demands from investors (the buy-side’s customers) and portfolio managers are increasingly becoming either North American or global in focus, thereby making the corporate competitive landscape larger. A company need not be ‘big’ – although this certainly helps – but it better be good. Competition for investment dollars is not just other companies operating in the ‘backyard’ but also those in other backyards thousands of miles away.
Bottom Line: How Can Your Company Help ‘Move the Needle’
It’s one things for investors to know how your company stacks up against its historical record or against competitors ‘next door’, but how does it match up against others within the portfolio manager’s mandate? Can your company ‘move the needle’? Think of ‘needle moving’ in two respects: meaningful improvement against the company’s own history (the internal needle) and relative performance against the portfolio manager’s investment universe (the external needle). You will need to demonstrate to portfolio managers that not only can you move your internal needle but an investment in your company will help the portfolio manager move the investment needle as well. Consider that while you are busy trying to beat your competitors’ returns on capital employed, the portfolio manager is trying to do the same thing: beat competitors’ returns. It’s clear how both size and relative performance can matter.
Target Your Time and Efforts for Maximum Effect
By putting your corporate ego aside, and really knowing your company and the relative landscape, you will be better able to make your pitch. If you can help a portfolio manager understand the competitive landscape, how and why it can change – and how investing in your company can help the manager move the needle – you are more likely to add or keep an investor. And is that not your goal?
Dirk Lever is Managing Director, Institutional Equity Research, AltaCorp Capital Inc.