Navigating the New Frontier: Active vs. Passive, MiFID II, A.I. & More…
By Brendan Fitzpatrick

In January, I had the pleasure of participating on a panel of experts at the NIRI Silicon Valley chapter event at the Four Seasons in Palo Alto. The panel, "Targeting - Finding Your Next Generation of Investors" opened with a discussion about why investor targeting seems to have recaptured everyone's imagination. There was agreement that there are three main reasons:

• An increase in passive investment has led to companies competing for smaller and fewer pools of actively managed equity capital.
• MiFID II has forced IROs to fill gaps in itineraries as markets have become more fragmented and conference participation has declined.
• Companies are increasingly aware of the significant investment they are making in targeting efforts and investment outreach overall.

I addressed the third, and perhaps most influential, point: the heightened awareness by management of the large investment of time and money they are making on outreach. For the first two decades of my career as a service provider in the industry, the topic came up very infrequently. That changed about three years ago as IROs regularly began asking about tools to enhance and report on the results of their many engagements with investors. We recently published a case study detailing how one of our clients leverages data to build a high-quality shareholder base.

And how should one go about finding new investors? The tide appears to have turned to fundamental targeting of funds vs. traditional industry or peer screening at the institutional level. My fellow panelist, Beth Saunders, Principal of Clermont Partners, commented, "We've had small clients come to us - when we first started working together - asking us to reach out to institutional holders of often much larger competitors who aren't interested in holding a small cap company. Finding out that these investors aren't going to be buyers of the stock normally gets our client thinking, 'how do investors think of us, if not in comparison to our competitors,' and should we shift our message to one that might resonate with our potential investor set who might have different expectations on how we generate free cash flow, return capital, invest to grow? They start to think more about what messages are consistent with our specific performance or financial profile."

Advertised as a forum to explore the effect Artificial Intelligence has had on targeting, the discussion included an interesting take on data. I believe the 'new frontier' is closer than we think. When we think of AI, we imagine an infinite array of datasets that we can manipulate to tell us how portfolio managers think. However, the most promising near-term area of new intelligence comes from having a better understanding of how portfolios engage and react to you, the IRO community. This is not aspirational…it's happening already.

Ahead of such intelligence becoming widely available, my fellow panelists and I agree the sell-side will continue to play a key role in brokering access. Tully Murphy, Senior Vice President of Equity Sales at Jefferies, made a strong case for continuing to partner with sell-side corporate access professionals. Her firm's local, on the ground, and regular engagement with its institutional investor clients results in Jefferies having a deep understanding of the personal and shifting nuances of investment managers, as well as their processes for making investment decisions.

Added Beth, "While the discovery process of identifying a new buyer for your stock - the right location, the right fund, the right analyst - can be challenging, we glean real investor perceptions on behalf of our clients when we are setting up NDR's and Analyst Days. Why someone won't take a meeting is often more interesting than learning how a meeting went. So, there's effort to be sure, but there's also real intelligence to be gleaned from these conversations."

The panel discussion was lively, and Q&A was fast-paced laced with anecdotes arising from experience, covering a range of topics from strategy to reporting. On that latter topic, the Q&A session uncovered the challenge many IROs have reporting their progress. Several expressed the complexity of reporting shareholder demographics; i.e. overall trends in the composition of the shareholder base by style, turnover, or peer exposure. Others noted that summaries at the institution level can look very different from summaries at the fund level. Familiar with the challenge, I recommended sampling the shareholder base to make the data more manageable. I believe it is important to consider individual stories - for example, a timeline of your engagement with an investor prior to a large initiation. In a normal quarter, there are probably only going to be a handful of material transactions - focus on those - Everyone loves a good story!

S&P Global provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.