Investor relations tips and advice for investors…
Alexforbes recently published its 2022 Manager Watch™ Annual Survey. The comprehensive survey covered 72 South African institutional investors and showed that assets under management (AUM) in the sector surveyed increased from R3 trillion in 2010 to R6.7 trillion in June 2021. The Public Investment Corporation (PIC), which is not included in the survey, reports that it was managing R2.34 trillion as of March 30, 2021.
If you include the PIC, consolidate all the different asset management brands within each financial services group, and ignore multi-manager double counting, then the top 11 investment management groups account for over 81%, or 7 .4 trillion rand out of the approximately 9 trillion rand. of institutional assets under management in South Africa.
This is necessarily an imprecise exercise, but what is undeniable is that AUMs in the SA savings industry have been growing steadily and the industry is relatively concentrated. It follows that the total market capitalization of the JSE also increased, which it did; however, the number of listed companies fell by more than 25% over the same period.
These same 11 dominant institutions, which owe their significant success to the historical breadth, depth and diversity of South African public markets, are now unfazed enough to describe all companies apart from the largest and most liquid as “uninvestable”, or by the less pejorative alternative, such as companies which “do not meet the requirements for acceptable size and liquidity”.
We have reached a point where most managers of over 81% of all institutional funds in South Africa have washed their hands of companies with a market capitalization below around R11 billion – the rough threshold for the 100 larger corporations.
Not only have the local managers figuratively washed their hands, they are deaf enough to say so. It’s all about institutional investor growth, efficiency, scale and margins. If that means summarily delisting two-thirds of the companies from the JSE or refusing to even consider participating in small company capital raises, for no other reason than their size and liquidity, then so be it.
Add to that the roughly 40% of local listed assets held by foreign institutional investors – so-called speculative money, which flows in and out of South Africa as international political and economic events unfold – and the overly institutionalized nature of South Africa. public procurement becomes quite clear.
What about the retail investor, those South Africans lucky enough to have discretionary savings? Aren’t they destined to take over? Many started their investing life as a client of an independent stockbroker, but now discover, without having moved their accounts, that they are instead a client of a private bank or wealth manager. Wealth managers have deployed all their marketing cunning, in a frantic pursuit of greater “portfolio share”, to persuade their clients that they are much better off in an indexed model portfolio, which essentially mimics these same institutional funds. who only invest in the large and the liquid.
Clients who resisted being asked to give up 1% or more per year of their savings for this model portfolio treatment and perhaps 0.75% or more per year for financial planning advice, been moved to self-service, non-advice, online secondary trading platforms.
What does all this mean for the practice of investor relations for “uninvestables”? This is where the traditional investor relations triangle needs to be reversed.
It starts with prioritizing, rather than neglecting, the remaining retail investors.
The “uninvestables” must find a way to move past the gatekeepers of wealth management to connect with the remaining self-directed investors. This requirement is best exemplified in a recent informal survey of SA brokerage clients, where only nine out of 95 respondents said they had been contacted by their broker to participate in a new listing or fundraising in the past decade. despite the 184 new listings in the period when at least 90 raised capital during the listing. Large retail stockbrokers no longer seem to serve as an effective middleman between individual investors and the institutionally “non-investable” end of the exchange.
What can be done?
First, companies should embrace digital investor relations. They need to develop an appropriate social media strategy, get advice on how to create digital content, and cultivate their relationships with financial and business journalists who generate freelance online content. Investor presentations and events should become professionally produced online webinars, and while all are welcome to attend, the primary focus should be to serve retail investors, smaller institutions and the press.
Second, companies need to reach retail investors directly. Companies should work diligently to enroll investors and potential investors in their own Popi-compliant contact databases and begin managing direct communication with investors.
“Non-investable” companies should probably avoid private banks and wealth managers who have not only moved their clients to quasi-institutional model portfolios, but have also added a significant layer of compliance that prevents brokers from the trading desk from even talk to customers about actions. that have not been pre-verified by an analyst and then approved by a committee. And very few analysts are going to venture outside of the top 100 stocks.
Uninvestables would also be well served to ignore the 11 largest institutional investors. It is highly unlikely that they will ever invest in the “non-investable” regardless of the investment case. In the unlikely event that one of the larger institutions might have an interested fund manager, they will get in touch. Don’t wait by the phone.
Firms should instead focus their institutional investor relations efforts on institutions outside the top 11 that manage the remaining 19% of assets, including the regulated hedge fund industry. It is also often better to spend an hour with an interested portfolio manager managing a R500 million fund than a junior analyst, without decision-making power, serving a team of portfolio managers managing R500 billion.
The lack of analyst coverage is another issue that needs to be addressed. The clients of the few remaining institutional stockbrokers are mostly the same dominant players 11 , so a “non-investable” company is highly unlikely to attract sell-side analyst coverage.
Companies should instead commission a research firm to prepare regular company-sponsored investment reports and should then distribute the reports through their database and website. Obviously, it must be clearly stated that this is paid research. What’s important is that all the heavy lifting required to arrive at a valuation – a spreadsheet financial model with variable input assumptions and an editable copy-and-paste ready-to-use document in a report format standard analyst – be made available to potential investors, so that they can easily come to their own conclusions and substantiate them.
The trajectory of SA’s public markets is becoming increasingly apparent – without some sort of political intervention or disruptive innovation, the concentration of the local asset management industry will continue to increase and the number of listings will gradually decrease until most “uninvestables” have been written off. Only companies large enough to displace an existing member of the top 100 will consider listing – and the public market will no longer serve its societal purpose as a primary source of capital for growing companies.
The best that “uninvestables” can do is hope for that political intervention or disruptive innovation and work to adjust their approach to investor relations as best they can. DM/BM