By Will Dyke, Senior AssociateAcclaimed investors Warren Buffet and Charlie Munger often are asked about their most significant competitive advantage. What is it? Reading and fact gathering, according to two of the 21st century’s most successful investors. However, today, active investment managers are increasingly betting not only on their own intellectual stamina, but computational power to generate alpha. The rise in this form of analysis has important implications for publicly traded companies and how they implement their investor relations programs.
Competition in the investment industry is cut-throat. Over the past two decades, the hunger for an “edge” has grown increasingly severe due to several macro trends. The advent of low-cost ETFs has driven the steady flow of retirement dollars away from active to passive management. European MIFID II regulations have worked their way across the Atlantic to further compress soft-dollar arrangements and research budgets for small- and micro-cap companies.
In their search for alpha, professional investors are increasingly turning to the use of innovative new technologies. This is particularly true for smaller, more nimble hedge funds. Quantitative funds, for example, strive to use sophisticated mathematics and algorithms to develop investment strategies for automatic execution. Newer fields of technology, such as artificial intelligence, machine learning, and natural language processing also are empowering investors to go beyond the confines of traditional fundamental research and incorporate novel analysis techniques.
Quantitative analysis itself is changing rapidly, and pioneering hedge fund managers are data hungry. Instead of focusing on structured data sets (those with clear organization and labels), managers can use new computational analysis techniques to interpret unstructured data sets. To put this in context, unstructured data makes up 75% of today’s available data and can take the form of text, 10-ks, press releases, earnings call transcripts, and more.
5 ways to modernize your IR program
As always, it’s important for executive teams to stay up-to-date on the changing investment landscape, particularly in the CFO and CEO suites. Here at Sharon Merrill, we help our clientele execute the following.
- Employ clear and precise language
Sentiment analysis, a method to systematically measure the positive or negative connotations of text, speech, and more, is one research technique developed using these new technologies. Unclear language often results in lower sentiment analysis scores. Quantitative traders can use these signals to execute trades, while more traditional investors also can be influenced by these same metrics in many of today’s third-party financial databases. Work to use clear and precise language that showcases your messaging in the best possible light.
- Front-run sentiment analysis
Some third-party financial databases have tools that allow you to upload and measure sentiment analysis prior to delivering a speech or hitting the “publish” button. Utilize these tools yourself or work with an IR firm that has the capability to make sure you aren’t missing any obvious red flags for computers.
- Craft AI-friendly press releases
AI-driven search engines typically focus on the headline and first 1-2 sentences of a release, compared with humans who will spend a comparably longer time. Always include the full company name and one-liner description in the first sentence of the release to make sure it is picked up and shown properly on the relevant databases. Also consider drafting bullet points at the top of the release to highlight the key messages for search engine algorithms and search result text snippets.
- Monitor shareholder base composition
Asset managers with at least $100m in AUM are required to disclose their holdings via form 13-F on the 45th day after the close of each quarter. Your IR team should make it a best practice to review and analyze your shareholder base on a quarterly basis. This is something we regularly do for our clients. Look at the types of funds who have taken and exited positions. Are there lots of quant-leaning hedge funds, or are you attracting a healthier mix of styles (e.g., long only, value, GARP)?
- Connect with new investors
Work with your IR team to generate a short-list of quality buy-side targets once you know your shareholder base composition. This typically means targeting institutions and funds with investment mandates that are aligned to your business’s financial profile and earnings track record. With the right marketing in place, your outreach efforts will align with your true investment value proposition, ultimately providing you with a better chance of improving your shareholder base health.
Humans first, technology second
Never forget that a key goal of your IR program should be to establish relationships with human investors (hence the “R” in “IR”). While these techniques are growing in popularity and use, investors and analysts are still very much driven by non-quantitative factors. There is no substitute for strong messaging, building connections, and getting “out there” to market your company. At a practical level, we advise taking a “human first, technology second” approach.
Does your IR program account for these industry changes? Is it positioned to deliver the full possible impact? Email us at info@InvestorRelations.com to learn how Sharon Merrill can help you stay ahead of the curve and execute world-class investor relations.