A selection of articles, whitepapers and IR TV videos focused on small-cap IR.
As regulations and market trends from around the globe impact investor sentiments in the US, it is important for small and micro-cap companies to stay updated on the most effective way to deliver good IR.
That’s why we’ve brought together a useful collection of recent articles, interviews, whitepapers, and videos focused on enhancing the everyday practices of investor relations teams at smaller companies.
We hope you find these articles helpful and, if you’re looking to discuss the issues they cover further, be sure to sign up and attend our upcoming IR Magazine Forum & Awards – Small Cap (September 26, OTC markets, NY) where we will discuss in great detail all the key issues faced by small-cap companies with heads of IR, c-suite, the investment community and industry experts.
Small caps suffering from negative estimate revisions and weaker earnings growth
Although recent market upheavals blur the picture, markets were mostly upbeat in the second quarter of 2019. Small caps have been under pressure however, with the benchmark Russell 2000 index of small companies underperforming the S&P 500, the Dow Jones and Nasdaq.
That said, on a year-to-date basis, the benchmark Russell 2000 index is up nearly 17 percent, though it remains more than 8 percent below the record highs it reached in August 2018. Margin pressure is weighing on small caps according to Barclays, which now estimates that small-cap companies will post earnings before interest, tax, depreciation and amortization growth of 2 percent this year, down from its estimated 5.5 percent growth earlier this year.
On such analysis, lower margins and less pricing power are preventing small-cap companies from either passing on or weathering the effects of higher trade tariffs to the same degree as large caps. This in turn, says Barclays, is making investors think twice about small caps – with the result that small caps are left underperforming. This is a big reversal from last year when many investors jumped into small-cap companies in the expectation that they would be insulated from the trade wars because of their focus on domestic markets.
Moreover, the Russell 2000 index is dominated by financial and healthcare stocks – two sectors that face the risk of squeezed margins from what has been a lower interest rate environment and the threat of increased governmental regulation in the US.
In this way, Bank of America Merrill Lynch’s senior US equity, small and mid-cap strategist Jill Carey Hall is highly cautious on small caps: as they have been struggling all year, she says investors should not expect ‘small-cap stocks to break out of an earnings slump’.
She tells IR Magazine: ‘Fundamentals are still weaker down the cap spectrum – small caps have still seen more negative estimate revisions, weaker earnings growth and fewer positive surprises relative to large caps.’
Carey Hall also challenges the narrative that small caps are removed from the trade war picture because of their focus on domestic markets. ‘Even though they’re more domestic, small caps aren’t insulated from trade tensions. Many are suppliers to big multinationals, or can’t as easily shift their supply chains or price through higher costs. The gap between small caps’ foreign exposure and large caps’ foreign exposure has also been narrowing,’ she notes.
One style Carey Hall expects to outperform is ‘quality’ – especially against a backdrop of rising volatility. ‘But quality has become more scarce within small caps. Right now about one fourth of the Russell 2000 index are non-earners – a level typically only seen outside of or leading into recessions,’ she warns.
The stars among small caps this year are mostly in healthcare and technology, highlighting the different levels and diversity at play in the small-cap arena.
‘Momentum can thrive in a market where you have a wide range of dispersions, and that’s especially true in the small-cap space, where you can have a big difference between the best and worst performers,’ says Jay Gragnani, head of research and client engagement, at Nasdaq Dorsey Wright in a statement.
In another twist in the small-caps narrative is the revelation that UK funds are among the most vulnerable to a market and liquidity shock – especially those that invest in small-cap companies, according to the latest analysis.
Research company MSCI analyzed the portfolios of 412 equity funds with more than €1 bn ($1.1 bn) in assets and identified several that would struggle to sell their underlying holdings at a fast enough pace in the event of heavy redemptions without resorting to a fire sale.
This is based on a SEC liquidity assessment, which evaluates an asset as illiquid if it would take more than a week to sell 5 percent of the holding in normal market conditions.
Related session at the Small Cap Forum in New York, on September 26
Briefing on the macroeconomic and financial trends impacting small and micro-cap companies
A short and sharp economic briefing will set the scene for the day’s discussions. Take stock of where we are right now, where we could be heading and what it means for investor relations activities.
Find the full agenda here.
Given the scarcity of clear disclosures from small and mid-cap companies versus large-cap peers, Hamish Galpin explains why a reliance on data can give rise to a misleading picture of smaller companies’ ESG credentials As the integration of ESG factors into investment decision-making becomes increasingly mainstream, over-reliance on simple answers and third-party industry data, rather than assessing complexities and directly engaging with companies, could lead to smaller companies being unfairly penalized by investors on the basis of partially informed ESG criteria.
The disparity between larger and smaller companies’ disclosure of basic ESG metrics is striking and, even in developed markets, ESG disclosure levels can be very patchy. These large gaps demonstrate the need to gain further sources of ESG information and, more importantly, to meet with corporate boards and management teams to develop a fuller picture of a company’s governance and management of important environmental and social risks.
ESG disclosures: Consistently inconsistent
The lack of readily available ESG information in the small and mid-cap segment means proactive engagement with company boards is required to generate profitable insights. Investors are unlikely to find such information from off-the-shelf tools, such as published databases, given the lack of disclosure.
Furthermore, the information found on databases is, by definition, historic, which compromises ratings derived from that data. ESG ratings can certainly raise red flags about major issues within companies but, in aggregate, the scores have some clear shortcomings.
Given the need to create scale, off-the-shelf ratings are often constructed without analysts forming a fundamental understanding of businesses or specialist industries. This can result in ESG ratings missing genuinely material factors influencing the performance of companies or taking a kitchen-sink approach and combining the meaningful with the trivial to form a confusing array of data points.
Imperfect picture: Why ratings distort ESG optics
Integrating ESG thoroughly into an investment process requires managers to sift through a wide variety of corporate disclosures as well as alternative data sources and in so doing consider a raft of issues – supply chain practices, resource usage and workforce management issues among them. Where it is available, investors should ideally consider ESG information alongside traditional fundamental analysis, with more detail on sustainability issues to be derived through direct contact with management. This latter process requires a rigorous approach aligning and integrating a range of variables, which is not easily outsourced to third parties.
Researchers have identified four key failings of ESG ratings, which are amplified when applied to smaller companies:
To illustrate the clear water between ratings-driven decisions and in-depth ESG investment analysis, we look at holding Brunswick Corp, which would likely be less favored if we relied solely on ESG scores from third-party research houses.
Brunswick is a US marine engine and boat manufacturer. Despite having a below-average ESG rating, we believe it is a high-quality company because:
Historically, the firm’s ESG disclosures at a group level have been limited. While its engine business produces a good sustainability report, this had not been well promoted or replicated at a group level. The company has, however, been consistently open to our engagement on ESG topics and has committed to expanding its sustainability strategy and reporting across the group. As disclosures improve, we expect the ESG rating of Brunswick to rise, although it will inherently continue to lag the reality on the ground.
This case demonstrates the need for credible and meaningful ESG analysis, and investors that are committed to this cannot, and should not, depend on ESG ratings.
Hamish Galpin is lead manager of the Hermes SDG Engagement Equity Fund at Hermes Investment Management.
Guido Pickert, head of IR at German small cap AIXTRON, talks attempted takeovers, Mifid II and how a start in radio helped make him a better communicator
Herzogenrath, Germany-headquartered AIXTRON might be a small-cap company specializing in something that sounds – and is – very technical (metalorganic chemical vapor deposition equipment), but the firm supplies technology to clients in the semiconductor industry and is a world leader in its field.
As such, the company has research labs and branch offices in China, the UK, Sweden and the US as well as sales and service offices representing the company in Japan, Korea and Taiwan. It also has the potential to be affected by many of the stories you read about in the news. Here, Guido Pickert, the firm’s head of IR, talks to IR Magazine about how he got into investor relations, how a US executive order cut short a Chinese takeover bid and how he and his team handle short-sellers.
Tell me a bit about how you got into IR, how the team is set up and what you did before joining AIXTRON.
My life before IR was always influenced by communication. During my studies and apprenticeship, I worked for major airlines at Frankfurt Airport practicing my communication skills with passengers from all over the world. Later I worked for a radio station in Frankfurt as part of a young, creative radio crew – further refining my communication skills.
I finished my studies in marketing and international business administration at the time of the Neuer Markt stock market hype in Germany toward the end of the 1990s. And this is when I was offered a role in a newly founded IR agency in Frankfurt – which I took. This opportunity was clearly the perfect job in which I was able to take advantage of my skills and previous experiences combining communications with my understanding of financials.
After seven years of extreme ups and downs in the industry, I took the opportunity in 2007 to join AIXTRON as a one-man team to manage the IR activities of the company. Following another very exciting period of ups and downs, I now oversee a four-strong team: a senior IR manager, a senior PR manager, a CSR manager and a support function.
In 2016 a takeover bid of AIXTRON by China’s Fujian Grand Chip Investment Fund was blocked by then US president Barack Obama. Can you tell us more about that and how it was handled from an IR perspective?
This was a very demanding period in AIXTRON’s history and the most demanding phase of my working life. In 2016 AIXTRON received a takeover bid from a Chinese investor. In preparation for the publication of the offer, all communication and IR measures were thoroughly planned. But what happened after the announcement was unique in its chronology.
We experienced ups and downs during the offer period, during which the German government withdrew its previously issued approval of the merger. This had never happened before, and our small team found itself having to deal with global interest from press and investors.
From an IR point of view, targeted measures to explain the deal rationale in numerous meetings and targeted campaigns led to a 78 percent acceptance rate of the offer. Despite this, the final result was that the offer was ultimately withdrawn following an executive order by the Committee on Foreign Investment in the United States and the US president, blocking the deal.
My major takeaway from this project was that preparation (for everything that can be thought of) is king. Any unforeseen events have to be dealt with quickly and in a pragmatic way, as time becomes extremely rare.
I’ve heard you comment that, at one point, AIXTRON was Europe’s ‘most-shorted company’. How did that come about and how did you handle that from an IR perspective? What is your advice for dealing with short-sellers?
This is, to a large degree, the result of very volatile performance in our shares – driven by volatile market and sector development. Usually in boom times, short-sellers bet on a downturn, which often results in high short quotas. We address some of the short-players that have a clear thesis for their position (versus technical short positions based on instruments in the market) by direct communication with them.
We see no reason to condemn these market participants. Instead, we would rather accept the challenge and face the direct communication as an opportunity to point out the opportunities available – and hope to convince short-sellers to abandon their position in this way.
For a small-cap company, AIXTRON has a healthy analyst following. Why is this?
We are in the very fortunate situation that AIXTRON shares are very popular with investors, which therefore motivates broker houses to cover the stock in order to satisfy the information requirements by their customers.
Do you actively target new investors? If so, how?
Not yet. We still rely on our investor network and the network of our brokers. We are currently in the process of implementing more of our own investor intelligence, however, in order to be able to either challenge and supplement the investor meeting proposals or actively target new potential investors on our own.
What changes have you made to your IR program (if any) as a result of Mifid II? What changes do you expect to need to make in the future?
We believe active investor targeting capabilities as well as CRM and planning tools are key to manage and sustain investor attention now and in the future.
What has been your biggest challenge in IR so far?
To motivate management– and ourselves – to face the mostly unhappy investors during lengthy downturn periods. Investor trust is best built in periods when times are tough rather than in sunny periods when IR communication is supposedly more fun.
What has been your IR highlight?
Having been recognized and awarded a number of times over the years for best IR practice during times of share price underperformance. This is the result of constant and open communication – even during the bad times. For example, in 2011 we saw a circa 30 percent drop in the share price from the year’s peak.
What are some of the top issues investors and analysts are asking about at the moment?
They regularly want to know more about the current trade tensions affecting the tech sector in general and AIXTRON in particular. After that, investors want to understand which existing and future end-market applications are enabled by AIXTRON technologies. Those investors with an investment focus on sustainability also want to know how AIXTRON technologies help to reduce environmental impacts in different areas.
If resources were no object what would you like to do better or more of?
I would definitely do more strategic IR work, such as active investor targeting and more intelligent relationship management as well as a more intensive combination of market and capital markets intelligence. In addition, I would broaden our active communication, such as through social media, and I would offer more intense internal and external educational work.
Finally, what would you be doing if you didn’t work in IR?
Given my profound understanding of technology and my private interests, I guess I would be in media, automotive or tech marketing.
Research providers increase coverage of small and mid-cap companies
Mifid II has resulted in asset managers choosing more boutique brokers and research providers increasing their coverage of small and mid-cap firms, as well as becoming something of an unofficial global way of working, according to research from Liquidnet.
The European regulation, which came into force at the beginning of last year, has resulted in 55 percent of respondents to a Liquidnet survey taking research from more than 50 brokers globally, the same as last year. But the type of broker is changing. Last year 69 percent of buy-side firms chose bulge bracket brokers for research but now they are differentiating between those that provide basic coverage and those where they want to engage with an individual analyst.
Rebecca Healey, head of EMEA market structure and strategy at Liquidnet, says in the report: ‘There is an increased interest in smaller brokers’ offerings or specialist research provision as a way to differentiate themselves and add value to their investment process.’ The survey finds that since Mifid II came into force, overall research spend has decreased for 39 percent and remained constant for nearly half – 48 percent – of asset managers. In addition, 13 percent of buy-side respondents are choosing to raise their research spend.
‘Increasingly, the focus for buy-side firms is not on how many providers to engage with but whether the brokers on the list deliver the quality and value-add that is expected to help with the investment process,’ says Healey. ‘By honing in on quality and alternatives, the opportunity for growth in research provision could be an opportunity for providers globally, not just in Europe.’
For example, 80 percent of research providers are now increasing their coverage of small and mid-caps in a bid to diversify their product offering.
Healey adds: ‘Identifying which research services firms are paying for and the price for those services will be the first step, whether via better identification of bundled commissions or choosing to pay for research direct from the profit and loss statement.’
Liquidnet also notes the observation, made by IR Magazine, that Mifid II has become something of an unofficial international standard, with the majority – 58 percent – of respondents choosing to implement the unbundling of Mifid II globally. In addition, a further 11 percent expect to adopt a global Mifid II approach in the next five years.
‘In Europe the change may be driven by regulation, but in the US it is being led by some asset owners requiring greater transparency over what they are paying for research and the services they are receiving in return,’ says Healey.
Roadshow trends revealed in the ninth IR Magazine Global Roadshow Report More than two fifths of IR professionals plan to go on more roadshows this year than last year, according to the ninth IR Magazine Global Roadshow Report. The survey of 615 IROs from North America, Europe and Asia shows that 94 percent of respondents went on the road in 2018. Poll participants believe roadshows are more rewarding than site visits, investor days or conference days, as meetings can be more focused.
And integral to a successful roadshow is investor targeting. Those polled say this is because it allows them to structurally plan shareholder meetings and have proactive engagements on investment opportunities.
Data from the report indicates that more than half of all roadshow targets were typically selected by the investor relations department in 2018, up from 42 percent the previous year.
Although this figure varies little by region, IR departments in larger companies (73 percent) are more likely to select their own roadshow targets than those in smaller companies (45 percent). Roadshow targets are selected by 43 percent of mid-cap company IR teams.
But with many small and mid-cap companies reportedly suffering the effects of a Mifid II-prompted sell-side contraction, the report suggests they are looking to market themselves more aggressively. Highlighting the main challenges around shareholder targeting today, Darrell Heaps, Q4 CEO, told IR Magazine earlier this year that there are two main issues affecting the current landscape.
‘This first is regulatory change: Mifid II. There’s an overall decline in the number of sell-side brokers serving the broader corporate markets,’ he explained.
‘Brokers are still helping larger companies, but there is also a far greater responsibility on IR teams to identify and connect with targets themselves. This is particularly visible in Europe, but it is also affecting the US and North America in general.
‘The second is the evolving nature of today’s investor, which is making the traditional method of simply matching, for example, a growth stock with a growth investor harder to achieve. Markets and investors have both evolved and, as a result, how investors are classified on traditional databases and how they actually behave are not always in sync.’
IR teams should focus on doing all they can to identify potential investors that are a good match on a number of levels, not just ones based on broad style classifications or peer analysis, he recommends.
Case Study: Petra Diamonds
Salisha Ilyas, senior investor relations and communications professional at Channel Islands-headquartered mining group Petra Diamonds, tells IR Magazine that the firm typically participates in non-deal roadshows following the release of its interim and preliminary results.
‘These are mostly focused on the UK, North America and Europe, where the company’s top shareholders and investor targets are located,’ Ilyas says. ‘Around 15-17 days are spent on the road: five days allocated to the interim results roadshow and the balance allocated to the preliminary results roadshow, with our CEO, CFO, COO and IRO participating in the meetings.’
The roadshows are organized by Petra’s three corporate brokers. Ilyas says they work with Petra’s IR team to identify targets and book meetings.
‘Priority is first given to Petra’s top shareholders: large fixed-income investors,’ she explains. ‘Meetings we are unable to fit into the schedule or accommodate during these roadshows are often scheduled at industry conferences that Petra participates in throughout the year.’
Getting additional sell-side coverage, expanding investor base with innovative approaches to targeting
Find out how IR teams can better access the different pools of capital, note how you can evaluate your targeting activities – what adds value and what doesn’t and much more.
Bank announces new hires in UK and Hong Kong HSBC has announced that it is expanding its small and mid-cap equity research teams, with new hires in the UK and Hong Kong.
The new additions to the equity research teams ‘demonstrate the increasing importance of small and mid-cap stocks to investor portfolios globally,’ says the bank in a press statement.
It adds that the newly expanded team will ‘address the significant gap between the investment requirements of small/mid-cap companies and institutional investors.’
HSBC notes that the UK small and mid-cap market – which it says is valued at £500 bn ($658 bn) – is not widely covered. David Phillips, head of equity research for developed Europe, says: ‘Our aim is to produce in-depth quality research, to understand the businesses and their supply chains fully.’
The news follows around two years of warnings that small-cap companies in particular would be hard hit by cuts to equity research after the introduction of Mifid II, which came into force at the start of 2018.
In London, five new analysts will be added to the small and mid-cap equity research effort. These are:
In Hong Kong, York Pun joins HSBC as head of small and mid-cap equity research for Asia-Pacific, with the bank noting that ‘the team will focus on ASEAN, Hong Kong and China-listed companies and add 150 small and mid-cap companies to its coverage’
Delve deeper into the world of small-cap IR with a selection of our whitepaper reports:
The latest white paper, prepared by OTC Markets, examines the basic governance standards for smaller companies, including:
Download this free whitepaper for practical information including insights and advice from asset management firms about what they look for in this area.
IR teams need to build a strong foundation for their investor relations strategy that looks five years ahead, rather than one or two. This white paper covers four key sections to consider:
Download this report for a guide on how to measure progress as your company builds toward long-term objectives
This report looks at M&A for small caps, including six reasons why a merger may be appealing for small cap companies, from driving faster growth, to exploring new avenues to increase shareholder value and returns, and more.
Download this helpful, straightforward resource today to find out what you need to know about M&A for small caps, whether this is something your organisation is considering or working on at the moment, or to be aware and ahead of the game if a merger or acquisition crops up in your career in future.
Watch our small-cap focused selection of videos from IR TV.
In this video interview, Marshall Koval of Lumina Gold Corp – a precious and base metals exploration and development company – provides an investor update.
In this video interview, George Glasier of Western Uranium & Vanadium Corp discusses the company’s inclusion in this year’s OTCQX Best 50 and provides a company update.
Speaking after the IR Magazine Forum – Small Cap in September, 2018, OTC Markets’ Jason Paltrowitz summarizes his takeaways from the day.
The IR Magazine Forum & Awards - Small Cap US, in association with OTC markets, is a one day best practice event on effective shareholder communications, designed exclusively for CEOs, CFOs, IROs and advisors from small and micro-cap companies.
Spanning multiple industries, over 100 CFOs, IROs, analysts, portfolio managers and industry experts will participate in panel discussions and Q&As on the latest trends and best practices.
This year’s event includes:
A unique format that enables participants to network extensively, discuss, debate, and dissect topical issues
Timely topics – the event is perfectly positioned to help you take stock of the year to date, refocus and plan for 2020
The opportunity to benchmark and evaluate where you stand in comparison to your peers
An awards ceremony recognizing micro and small-cap company contributions to investor relations
Holders of the NIRI IRC® credential can also earn up to 4 professional development units (PDUs) at the forum.
Book your tickets and find out more about the event here.
For agenda-related inquiries Gargi Iyer gargi.iyer@irmagazine.com +44 20 8004 5619 For seat booking inquiries Paul Campbell paul.campbell@irmagazine.com +44 20 8004 5339
For sponsorship inquiries Brigitte Toledano brigitte.toledano@irmagazine.com +1 212 430 6861