March 1, 2023

IR 2.0

“Our strategy,” said the investor-relations officer to the chief financial officer, “is to target the bottom part of the graph here.” 

See image, from the Investment Company Institute’s 2022 Factbook.

Source: ICI 2022 Factbook, page 62.

“Hm,” said the CFO.  “Looks like we need a new plan.”

Yes, our profession needs a new plan.  I’ve been saying it for years.  We’ve been largely able to continue doing we’ve always done because the c-suite doesn’t know.

That’s changing.

I shared the image here with a group of IR prospects yesterday. One person replied and said, “Sure, let’s have a chat about IR 2.0.”

He’s a CFO.

Here’s more. Thanks to our good friends at Rivel Research, I’ve got a conversation Friday with a CEO and a CFO.  They asked the IR guy, “What do we know about algorithmic trading? Should we be doing IR like we did a decade ago, or should we be doing something else?”

The IR guy asked Rivel.  On algorithms, Rivel pointed the IR guy to us.

The stock market is about 98% algorithmic, 100% electronic.  That’s not really the issue.  It’s the effect that rules and machines have on how prices are set. 

Knowing how prices are set, and whether SEC rules are helpful or not to public companies is an IR responsibility.  A core one. It’s part of IR 2.0. We’re supposed to be the experts.

Speaking of which, I’m participating with a rock-star lineup in a NIRI Virtual Chapter meeting Mar 8 at noon ET on the SEC’s proposed new rules. They’re massive – 1,650 pages.  There are four or five key things you need to know, so you can share with your executive team. 

Maybe you can even address the Board about them. Your directors are fiduciaries.

You see, this is IR 2.0!  Oh sure, it’s fun staying at the Ritz Carlton, going to the Credit Suisse conference in Miami or wherever, riding around in cars with drivers, eating that glorious chicken at The Nomad in New York.

But I refer you to the image above.  You can keep doing IR 1.0.  What you can’t keep doing is leading everybody to believe that telling the Story, IR 1.0, drives value. 

That money is shrinking. If you think glaciers are getting smaller, take a look at stock-picking funds.  Wow.  Do you know that the number of stock funds has fallen every year since 2015?

And there’s this from the page 54 of the 2022 ICI Factbook: “…Demand for ETFs has been very strong over the past decade. Domestic equity ETFs had net creations in every month of 2021, which resulted in $520 billion in net share issuance. In contrast, domestic equity mutual funds had net outflows of $419 billion over the same period.”

Money is switching to Exchange Traded Funds (ETFs).

So what?

In a sense, you’re right!  I don’t care what the investment vehicle of choice is, so long as public companies understand how those vehicles work and what’s controllable.

And ETFs are not mutual funds. The assets they hold are not fiduciary assets because they’re not associated with custodial accounts.  All those assets in Blackrock ETFs?  They belong to BLK shareholders.  Not to investors owning Blackrock ETF shares.

I’ve explained it many times.

When money shifts to ETFs, the price-setting mechanism between the ETF and the stocks the ETF tracks – the basket – becomes an arbitrage trade.  ETFs have infused the market with shorting.

Trading ETFs versus a basket of stocks is bona fide market-making. So if you’re engaged in that kind of a arbitrage as a firm, you can create stocks, or ETFs. Just – poof! – manufacture stock.

You don’t have to follow short-locate rules, thanks to a market-making exemption.

This week, nearly 52% of S&P 500 volume is short, borrowed.

These practices shift price-setting from business fundamentals to arbitrage. And this kind of investment is increasing exponentially at the expense of long-term stock-picking.

Investor-relations professionals need to understand this stuff. It’s not just a shift in investment behavior. It’s an existential threat to issuers and the IR job.

If we can’t provide valuable information and support and advice to our executive teams and Boards, why have the role?

And if issuers can’t use the equity market for efficient capital-raising because investors prefer ETFs, they won’t come public.

It’s way past time for IR 2.0.

The most liquid trading vehicle I believe I’ve ever seen is SH, the ProShares S&P 500 Short ETF.  Routinely there are millions of shares at the bid and offer.

At the close yesterday, there were 770,000 shares at the bid, 81,000 at the offer. Ten times the interest in being short than long — but huge liquidity any way you cut it.

By contrast, I had to cancel a marketable limit order to sell 99 shares of KMB Monday and reprice it (at a worse price) because it didn’t fill.

My 99-share trade at the market for CROX split into three orders for 16 shares, 63 shares and 20 shares, all at Instinet, owned by Nomura (almost never do my marketable orders reach an exchange and if they do, it’s a bad directional signal).

So, which stuff is big money going to trade?

All of what I’ve just said is IR.  Things our profession needs to know. Because we’re the experts for our companies on how markets work, and what the money is doing.  That’s IR 2.0 — the beginning point for it, anyway. There’s more. Ask us.

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