30 March 2017 Strictly Private and Confidential Global Trends in Investor Relations Senior IR Roundtable Discussion Grand Meliá Palacio de los Duques, Madrid Citi Depositary Receipt Services
30 March 2017
Strictly Private and Confidential
Global Trends in Investor Relations Senior IR Roundtable Discussion
Grand Meliá Palacio de los Duques, Madrid
Citi Depositary Receipt Services
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Rivel Research Group
Who is Rivel Research Group?
Established in 1991
A unique specialty – investment community perception research
Custom investor perception research – 150+ projects annually
6,000 telephone interviews with investors globally each year
Clients include half of Global Fortune 100
IR best practices: Intelligence Council (200+ member companies)
• Quarterly, broad-based buy-side surveys
• Structured lines of inquiry, telephone interviewing
• Representative
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Global AUM in passive investment accounts stands at $6 trillion
Inflow into passive investors has been at the expense of active
managers
– Hedge funds under pressure
– Asset base increasingly institutionalised
Moody’s: Passive investment will exceed 50% of global AUM
over next 4-7 years
Passive investors are major shareholders of all large companies
– Vanguard: top 5 holder of every S&P 500 company
– BlackRock: top 5 holder of 423 S&P 500 companies
– SSGA: top 5 holder of 421 S&P 500 companies
Possible reasons for the shift:
– Passive is cheap
– Active funds have struggled
– Stock market ownership cycle
– Picking funds is hard
Changing investor landscape: Shift to passive investment
$534bn Last 12 months
global outflow from
active equity funds
Last 12 months
global inflow into
passive equity funds
$442bn
Source: EPFR
3
“Passive investors, not passive owners”
– Passive investors are progressive and active voters
– Often cannot “vote with their feet” so seek to raise governance standards of all companies
– Need to understand the voting policies of your large passive investors
– Voting policies can be a filter in investor targeting
Active managers will continue to set stock prices
Risk of increased ownership concentration
Implications for capital raising venues
Targeting active investors
– Differentiate by shaping outreach strategy to reflect changing buy-side preferences
Domestic investing preferred over international investing
Cash flow, sustainable results before earnings growth
– Explain how performance will be realised in uncertain times
– Prudent guidance
– Protect credibility
Changing investor landscape: Implications for IROs
4
Changing investor landscape: Direct investor outreach
48%
43%
6% 4%
More No change Less Uncertain
Time spent targeting vs. 2 years ago*
*Senior IROs in N. America and Europe
14%
50%
22%
12%
1%
Very receptive Somewhat receptive
Not very receptive Not at all receptive
Uncertain
…but receptivity is modest at best
**Global buy-side
How receptive are you to outreach from IR?**
IROs are spending more time
on direct outreach…
5
Changing investor landscape: Investor targeting fails
14%
22%
25%
35%
58%
64%
69%
81%
Not part of index
Evidence of activist interest
Insufficient sell-side coverage
Wrong exchange listing
Wrong sector/industry
Wrong cap size
Wrong country/don't invest there
Not a fit for investment style
*Global buy-side
Biggest targeting mistakes*
6
Changing investor landscape: Building blocks of valuation
29%
35%
39%
49%
49%
50%
50%
50%
58%
63%
70%
70%
79%
CSR/sustainability
Attractive dividend
Economic/industry trends
Good revenue growth potential
Corporate governance
Innovative products/services
Prudent capital deployment
Attractive EPS growth
Sustainable margins
Strong balance sheet
Effective business strategy
Management credibility
Reliable cash flow
*European buy-side
Most important investment drivers*
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Understand who the activists are
Low free float does not offer protection:
activist campaign can cause distraction and
embarrassment even if it cannot unseat the
board
Activists do not act alone
– They talk to your largest shareholders and have
support of significantly higher percentage of
your register than their own shareholding
Self-help is the best defence against
activism:
– Be your own activist: look at your company in
the same way an activist would
– Develop and communicate a plan to address
any issues that may leave you vulnerable
Well-funded activists do not go away if they
lose in the first skirmish
– They will be back
– You need to show that your business can
deliver the promised performance
Investment trends: Shareholder activism
8
90
100
110
120
130
140
150
160
2012 2013 2013 2014 2015 2016 2017
Activist Hedge Funds All Hedge Funds FTSE 100
54.8%
23.1%
5.7%
Strong activist fund outperformance
over last 5 years
Source: Activist Insight
Investment trends: Shareholder activism
GLOBAL BUY-SIDE
68% BELIEVE ACTIVISM WILL INCREASE
OVER NEXT COUPLE YEARS
3% 9%
4% 1%
2%
32%
19%
26%
64%
78%
63%
North America Europe Asia Pacific
Uncertain Decrease
Little change Increase
Buy-Side’s Near-Term Expectations for Shareholder Activism
9
Investment trends: Shareholder activism
The Threat
Among Global Buy-side:
46%
15%
Have been contacted
by an activist in the
past year
Have proactively contacted an
activist to voice displeasure about
a stock they own
Report that an activist has
successfully recruited their support at
one time on a stock they owned
(among those who have been
contacted by an activist)
45%
10
“We believe that a data-driven, scientifically based and technologically aware research
culture can produce sustainable alpha.” BlackRock Scientific Active Equity team, September
2015
Quantamental investing aims to eliminate the potential weaknesses of traditional systematic
investing by combining it with fundamental macro analysis
Requires significant investment in systems and analytical talent by buy-side but the rewards
can be high – Renaissance Technologies’ International Equities fund grew by 21.5% in 2016
(source: HFR)
Implications for management and IR: your investors may know more about the likely future
trends affecting your business than you do
Investment trends: Big data and quantamental investing
Example 1 Example 2 Example 3
Aim: measuring impact of
employee sentiment on
company profitability
Data type: automated web-
scraping of job sites where
employees provide feedback on
employers, social media, blogs,
chat rooms
Aim: predicting consumer
confidence
Data type: tracking online
search activity of big-ticket
items, segmented by region
Aim: estimating revenue
between quarterly results
Data type: credit card metadata
showing consumer spending
11
57% of investors say that governance is a more
important decision driver than it was two years ago
Concern over corporate governance is the top
reason that stops US investors from investing in
non-US companies
Portfolio managers increasingly see governance
as part of their role
Stewardship Codes for institutional investors are
spreading
Governance roadshows are becoming more
prevalent
– Improves communication and mutual
understanding around governance topics
between investors and the board
– Creates a forum to explain rationale and
philosophy on governance issues
– Attendees will depend on key issues
Corporate governance: Becoming more and more important
Protecting shareholders
rights
Board independence,
diversity & refreshment
Remuneration
Corporate culture
Transparency
IROs need to be equipped to talk about
a range of governance issues
12
Corporate governance: What does good governance look like?
52%
53%
66%
69%
72%
81%
84%
88%
95%
High governance ratings service score (ISS, Glass Lewis)
Meaningful CSR/sustainability guidelines
Establised CEO succession plan
Separation of Chairman and CEO roles
Good proxy access
Management pay linked to company performance
Clear code of conduct promoting ethical decision-making
Strong/objective board of directors
Commitment to transparency and disclosure
*Global buy-side
Very important hallmarks of first class corporate governance*
13
Issues at the forefront of investors’ minds are likely to include:
Board independence, composition and diversity
Remuneration
Environmental and social risks – particularly climate change
Regulatory and legislative change
– Shareholder Rights Directive
– Audit regulation
– Non-financial reporting
Stewardship and engagement
Corporate governance: Outlook for the 2017 AGM season
14
The capital deployment dilemma
Response to question: What would you most like to see
companies do with cash flow?
Source: Merrill Lynch Global Fund Manager Survey, Nov. 2016
Payout… …or capex?
Investment/payout ratio of markets and sectors against current
valuations
Source: Citi research, Worldscope, Factset (ex-financials)
Companies who pay out more than they
invest are usually awarded higher multiples
than those who do the opposite
An increasing percentage of investors are
indicating that they want to see companies
increase capex
15
The capital deployment dilemma: 10 years of change
9%
57%
38%
18% 16%
45%
9%
33%
41% 41% 43%
53%
Large acquisitions Stock buybacks Dividends Bolt-on acquisitions Pay down debt Capex
2006 2016
Percent of global buy-side that strongly supports each initiative
16
Excellent Good Fair or poor
The capital deployment dilemma: Importance of communication
Clarify capital deployment and link to management’s strategic
rationale – few do it really well*
17
*Global buy-side
Reduction in amount of substantive research
Fewer analysts covering each stock
Reduction in corporate access provision
Lower liquidity
Consolidation of asset managers
Fewer IR advisory resources
MiFID II: Uncertain consequences
Increased workload for IR teams
Inability to calculate meaningful consensus
Need for more direct investor outreach
Higher IR costs
Bigger impact on small/mid-cap companies
18
EU Market Abuse Regulation
US Stewardship Principles for Institutional Investors
SEC and ESMA guidance on the use on non-GAAP measures
EU Non-Financial Reporting Directive
Potential repeal of Dodd-Frank provisions on shareholder protections and governance
Modern Slavery Act
Other regulations that may have an impact on IR practice
19
Company websites continue to be the go-to place
for investors
Your investor presentation is one of your most
important tools – make it easy to find, download
and print and keep it up to date
Many investors will access your website on a
mobile device; make sure yours is responsive for
both smartphones and tablets
Social media has not developed into the powerful
investor communication tool that was once
anticipated
– 72% of IROs do not use social media for work
purposes (source: NIRI)
IR apps have also yet to fulfil their expected
potential
– Think about web apps rather than Apple and
Android
IR websites are vital but social media for IR has lost importance
How to impress website users
• Conventional site structure,
navigation and labelling
• Standardised approach to data
provision
• Clearly signposted archive of
results materials
• Annual reports in simple,
hyperlinked pdfs
How to distress website users
• Style over substance
• Ignoring the needs of private
investors
• Forcing professionals to hunt
around for information
• Assuming that investors will only
look in the IR section
Source: Bowen Craggs & Co.
20
Investors say that IR
matters more than ever...
Proactive IR can be your differentiator
62%
88%
2012 2015
Believes good IR
affects valuation
...but 70% of companies are
not doing IR that well
32% 31% 28%
33% 28%
0%
20%
40%
60%
80%
100%
US Canada UK Cont Europe Asia-Pacific
What percentage of companies that you
follow have superb IR?
Global Buy-side
21
Global Buy-side
Proactive IR can be your differentiator
Eurozone Debt Superb IR premium
+10%
Poor IR discount
-20% Risk
Opportunity
Challenge
% Companies with Superb IR
31%
The Delta
22
Global Buy-side
Contact us for more information
23
Citi Depositary Receipts Rivel Research Group
Lisa Williams
Director, EMEA Head IR Advisory
+44-20-7508-6135
Niccolò Cominacini
Vice President
+44-20-7508-2708
Claire Lavery
Vice President
+44-20-3356-2791
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