Economics and technology have changed the investor landscape, and IROs need to adapt their programs to adjust to the new realities. That was the message our two guest speakers told an audience at a recent luncheon in Chicago hosted by Clermont Partners.
Value shop CEO Josh Strauss of Pekin Singer Strauss and High-frequency Firm CEO, Irene Aldridge both agreed that passive investing, high-frequency trading and social media have caused permanent changes to the investment industry. It’s not “business as usual” anymore, and IROs increasingly cannot gather intelligence on those trading their stock, or use communications to effect daily volatility.
Our panelists noted that there has been a permanent shift toward passive investing, which has accelerated with the multi-year bull market. Passive investments perform relatively well in up markets, as the loss of information advantages on stocks from Reg. FD and the instantaneous dissemination of information, makes it more difficult than ever to beat the S&P 500 and other large-cap market averages. Today, it is estimated that approximately 34 percent of equities are now invested in index funds. The number is likely much higher, considering “closet” index funds, which are actively managed funds with more than 30 to 40 holdings, according to Strauss.
The rise of high-frequency trading, or HFT also has pushed investors out of the market and is the single biggest contributor to flash crashes and unexplained volatility. On any given day, HFT accounts for 20-30 percent of average daily market volume, according to Aldridge, whose firm uses Big Data analytical techniques to provide micro-structure intelligence to identify and manage risk in real time. At any given moment, HFT can account for zero to 100 percent of the shares traded on any of the 63 trading venues in the U.S. This computer-driven algorithmic trading has taken over from day traders. High-priced, big stocks are in the HFT domain, as lower-priced and dividend-paying stocks are less attractive and costlier to trade.
While providing much-needed liquidity, HFT, in arbitrage with exchange-traded funds (ETFs), also add unexplained volatility to individual stocks, says Aldridge. A price decline of one stock lowers the value of the ETF basket, which triggers program selling of the other stocks in the basket and potentially a flash crash. It also renders traditional stock surveillance services useless on high trading days, with shares turning over many times on untrackable dark exchanges.
Interesting, both the panelists called out social media as both a factor increasing daily volatility of stocks and a tool for the buyside to identify new small land micro-caps to invest in. Aldridge’s research has shown that the more times a company is mentioned in the social media ecosphere, the bigger the daily stock price move. Able Markets’ research shows that mentions in longer-form pieces tend to push a stock price up, while short messages, such as tweets, have the opposite effect.
Technology has also enabled the democratization of research, with sites such as the Value Investors Club, Sum Zero and Seeking Alpha gaining in prominence for the generation and sharing of ideas among professional investors, noted Strauss. He called this a logical outcome, as the quality and level of brokerage research has continued to decline.
While the landscape has changed, Strauss stressed that there is no substitute for good, fundamental investor relations. It is vital, he says, for companies to “nail” their investor presentations and maintain a website that effectively tells the company’s investment story. A company’s investor website needs to be updated regularly to remain fresh and be responsive to current investor concerns. It is equally important to deliver a polished, high-quality conference call, with well-crafted messages and thoughtful answers in the Q&A. A good quarterly call is particularly vital when delivering bad news, as it is the best opportunity for management to frame the issues and lay out a remediation plan. With an investor’s time already stretched to the limit and potentially many calls scheduled on a given day, Strauss urges IROs to incorporate any potential material news into the quarterly press release, and not leave it for announcement on the call.
He also said that it is the company’s job to identify good investors for their stocks, and relying on the sell side or corporate access was a mistake. Particularly for micro- and small-cap stocks, IROs should supplement the work of corporate access teams at the brokerage firms that follow them with independent targeting activities to ensure the most appropriate alignment of targets with their companies.
As IROs look to 2017 and beyond, they need to understand how new technology-driven forces – trading platforms, research, social media – can affect their company’s stocks. They need to adapt their programs to remain relevant in an era of massive change, both to be responsive to investors and add value inside their companies. At the same time, the fundamental ability to tell your company’s story in a clear and concise way, focusing on growth, profitability and capital returns, remains timeless.