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Rewarding Corporate Access: What Does the Buyside Value?

In between various meetings in London last week, I dropped into the Third AQ Research Conference, to attend a panel on “Rewarding Corporate Access: What Does the Buyside Value?”

My notes follow:

Speakers:

Ralf Frank, Chair, German Association of Investment Professionals. Hosts 250 events / year where corporates present in one-on-ones. Moderator.

Alex Barr, Aberdeen Asset Management

Vikas Nath (spelling?), North South Capital

Jennifer Morris, Manager, Governance and Engagement, Hermes.

Largest pension fund in the UK. $63B sterling under mgmt. Looks after passively managed portfolio. Hermes well-known for corporate governance and engagement work. Frequently talks with underperforming portfolio companies.

The reason: 15 years ago, trustees of BT pension scheme argued: when you’re a passive investor, you can’t sell the underperforming companies, so you should work on fixing them. Clearly, access is important to them.

Unbundling doesn’t change corporate access that much, at least in the UK. It’s rare mgmt. turns down their request for a meeting. In the UK, it’s not necessary for them to go via a broker, so they wouldn’t pay for that service. Overseas it’s different—they’re not as well known overseas, so an intermediary is more important.

Risk of double-counting/double-paying. One of the roles of a corporate broker (in the UK) is that a company pays the corporate broker to set up meetings for that company with investors. (This is not as common a model overseas.) Why should Hermes pay the corporate broker to set up meetings when they’re ALSO being paid by the company to set up those meetings?

Ralf: How important is written research?

Morris: The demand for maintenance research will drop under unbundling. We’re going to have to be able to tell the FSA why it’s worth our clients’ while to pay for these particular services—-regurgitation. She’s interested in longer-term perspective research, that draws on not-yet-financial issues. Issues on the horizon. More original research, drawing on issues investors haven’t yet focused on. Interested in work that helps us engage with investors in a more meaningful way.

Alex Barr, Aberdeen Asset Management. Until recently a small buy-side organization. By recently buying Deutsche Asset Management London, but has become a much larger organization.

Charles Scott of Morgan Stanley talked about how alpha generation is most important issue. Hard for buy-side to ascribe value to research, when the sellers of research can’t do it themselves. Research remains a small part of total execution cost for client.

Aberdeen is interested in investing in long-term. “Impatience is the enemy of outperformance.” We have a duty to minimize total transaction costs.

Corporate access is the most central part of investment process.

Sell-side never drives investment decision. We meet mgmt. team of every company in which we invest. We use brokers to set up majority of corporate meetings, and post-Deutsche acquisition we’re doing more of that. We rank market counterparties on their ability to provide corporate access.

We are paying for 3 things:

– execution

– corporate access

– Research (we use only a limited amount)

They generally don’t use broker analysts. Corporate access is embedded within total research cost.

Vikas Nath, North South Capital

We are one of the 2000 hedge fund startups in London, mostly managing $30-$500M with commission buckets of $2-$10M. Maybe 5-10 professionals.

Strategy: Global emerging markets equity long/short.

The regulatory burden is as heavy on them as a much larger firm, but they don’t have the same infrastructure to deal with that burden.

We have very limited time to deal with everything that we’d like to do.

We don’t have time to do primary research.

When we call a company to set up a meeting, “Their answer begins with an F and the last word begins with an F” because they don’t know us. (laughter)

Very relationship driven.

It’s more convenient for them to pay for research + execution in one single fee.

Morris:

Outside of the UK, we do roadtrips, meet with foreign companies when they’re visiting the UK.

Barr:

We are increasing the number of meetings we organize ourselves. Corporate access is the lion’s share of the residual after commission.

Nath:

If we have to, we will pay for corporate access. A lot of the commission we pay is for structured products, so we don’t know where bid-ask starts and ends/commission starts and ends.

We see 10-15 companies a week between 3 investment professionals.

Frank:

Could sell-side be out of business, because buy-side is making their own investment decisions, setting up their own meetings…what’s left for them to do?

Barr:

Sell-side won’t let that market go away very quickly. Vast amount of buy-side firms (excl. Aberdeen). who will be very heavy users of sell-side research. If sell-side vaporizes, we have a more imperfect market, which is good for us.

Morris:

Good sell-side research providers don’t have to worry.

Every few days I get a call from yet another research provider who wants to talk about what they’re offering.

Vikas:

I’d be happy if Aberdeen/Hermes set up more meetings themselves, because that gives me more one-on-one meetings, and fewer group meetings. (laughter)

Audience member:

What is the value-add you extract from company meeting.

Barr:

Corporate meeting is the single most important part of our investment process. Our process has worked very well for us, based on that foundation stone.

Mgmt. is not going to meet with every investor.

Morris:

Very often investors don’t want to meet with company mgmt.—it’s too much work. I usually talk with underperforming companies. I’m looking for reassurance.


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