Now a focus on stock lending.

The genie truly is out of the bottle. As regulators all over the world come to terms with whether to ban short selling, or whether to require disclosure, and if so how, a new enquiry is underway.

Stock lending has a distinguished history of helping in various market situations. Lost certificates, dividend arbitrage, hedging and many other legitimate tactics have underpinned the returns to long investors.

However, as part of the moves to enhance transparency in equity derivatives, regulators (including in the UK), are starting to enquire quietly about its processes.

Do all participants fully understand it and its consequences? Are institutions always aware of the levels of lending in their assets? And do they factor the impact of the use of “their” stock in equity derivatives on the market price of the securities?

To what extent do lenders assess risk, such as potential delays in settlement, in risk models? And what is the potential for so called ‘empty voting’ – where the stock is borrowed before a vote, the proxy exercised – and the stock returned immediately afterwards? This potentially runs counter to the long term investment strategy of the lender.

These and other stock lending questions are surfacing in regulatory circles at the moment: can a full consultation on today’s model of ‘aggregated’ disclosure in stock lending far behind?

And market participants will want to know when the genie of requiring disclosure of synthetics will be stuffed back in the bottle.

Expert says - back to basics in IR

When a fund manager with decades of experience in stock picking speaks, we tend to listen. Anthony Bolton’s new book (Against the Tide by Anthony Bolton. Published by FTPH, price £14.99. © Anthony Bolton 2009), has some very important messages for IR practitioners.

In discussing how he approaches analysis of a potential investment in a company, he starts with the narrative. What business is the company in? How sustainable is the sector and the macro prospects for that sector? What is the ‘equity proposition’ and will it make money over the next 10 years?

Importantly, Bolton emphasises that he reads in the original the results press releases put out by companies. He does not rely entirely on commentary and analysis from either the media or the sell side.

These attitudes emphasise once again the importance of wordsmithing in news releases, in annual reports and other media through which the company communicates to the market. The “tonality” of company news is driving investor decisions and indeed automated trading systems in a major way.

Next, Bolton’s comments reaffirm the need to profile the experience of senior management. He looks for managements that are fanatical about the business, and understand it nuts and bolts. He says he prefers companies where management has a significant personal shareholding, and of course those where the shareholding is increasing. Corporate communications that highlight that level of commitment, rather than just a ‘Directors Dealing’ release, will help win the support of investors like him.

And again, thinking about how the business can be explained, he wants the business model and the equity proposition to be simple to understand. Clarity in company-generated news, building the picture of the company will help.

These sound like truisms, gee whizz. But I am constantly amazed at how few companies follow the most basic rules of marketing, in IR. Have we reached a stage where we are so focussed on the technicalities of IR, that we have ‘assumed’ the fundamentals are taken care of. Anthony Bolton in his comments seems to think it is worth reminding us.

Annual report season: what a variation in approach.

Its that time of year again when the calendar year end annual reports become available. And I have been working on a project for Radley Yeldar to review the FTSE 100 reports. The result will be available in May, when the final deadline of end April has passed, so watch this space.

What is already apparent is the vast range of approach taken by different companies.

First, what is the purpose of the annual report? Some clearly take the view that the annual report is a compliance document, pure and simple. Disclosures are made, and the intended audience is the regulators such as the FRC who will review whether the rules and guidance have been followed.

At the other end of scale, companies have regarded the annual report as a great communications opportunity for different stakeholders: employees, institutional and retail investors, suppliers, customers, environmentalists. Each will have their own informational needs, and the best reports are written and designed in ways that meet all those needs.

Second, how have companies adapted to reporting in the very different economic conditions from the last time? Again, there are some outstanding examples, and some that have followed a formulaic approach. The approach to explanation of liquidity risk and debt disclosures, for example, vary markedly.

The ‘accessibility’ is also varied. In some, a great ‘story’ is told, with engaging commentary and supporting images. In others, lawyer-speak is used, and text dominates.

So the analysis of best practice through “How does it stack up” (the RY research) will be fascinating.

It has been a known for a while that the sell side research model is changing – if it is not broken altogether. With rising costs and CA teams leaving, independent research is gaining in acceptance. Now this debate has been given even more credence by comments Paul Volcker, ex-Fed chairman and Obama guru in The Times, no less.

It may well have a substantial impact on how IR communicates with the buy side.

Broadly the debate goes around the theme that sell side research is nothing more than advertising, and should be acknowledged as such. You can almost hear it.
”This research has been brought to you by…insert investment bank”.

The counter goes that with the revolution in low cost trading platforms, and more transparency in execution fees, there is less money for fundamental research.

Combine this with the evident inverse relationship between sell side recommendations and the actual outcome (as per analysis done by State Street late last year), as well potentially conflicted analysts, and it is evident that there is a momentum towards new ways of informing and influencing the buyside.

What are the implications for IR teams? Traditionally, research has acted as a useful channel to market for the equity story. New channels will be found. These are likely to include resurgent independent research, paid for in hard, rather than soft, money. And that research will need to be innovative and solid, with much of the core, fundamental analysis being done in house by the buy side.

Other changes will include the organisation and support for corporate road shows. With the decline of the corporate access teams, and the potential remodelling of the investment banking trade, companies will need to find other ways of organising investor trips. No doubt commercial firms, with access to investor targeting tools, will step into the breach.

And let’s not forget other communication opportunities. The debate has been on for a while, as to the role of the hard copy and online annual report. Compliance or communications opportunity? Many companies will want to use every channel open to them for communications.

Yet another by-blow of the changes in the banking model.