Will this be the year? 

Speaking of which, happy New Year!

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Photo 16443226 | New Year © Quentin Bargate | Dreamstime.com

The year for what, you ask?

I was reading an Institutional Investor piece yesterday from the NIRI IR Update Daily on what investment managers see.  Forty-one percent expect a 2024 decline in revenue.

Why? Fewer assets under management. The article references a Deloitte study on trends for actively managed funds. Stock-pickers saw $1.2 trillion of outflows in 2022, double the $500 billion or so annually that data from the Investment Company Institute says has migrated from active funds to passive ones or other alternatives the past 15 years.

The 2023 data aren’t out yet.

Alternative managers like private equity have done well attracting flows, the Deloitte study says. Hedge funds, too, a reason, public companies, that you find them crowding your sellside conferences while long-onlys go missing.

And I don’t think it’s that hedge funds are smarter. They have better data, they’re leveraged, they’re hedged, they’re long-short, and they trade outside market hours through prime brokers. To generate alpha now, you need those advantages.

So, Quast. The year for what?

I’m getting to it.  Our profession spends a great deal of time talking about the same old things. How do I target investors? How do I attract sellside coverage?  How do I grow my shareholder count?

I’m reminded of something my friend Rick Santelli from CNBC said back in 2009.  Is anybody out there listening? The point isn’t “those poor investment managers, with falling revenue and falling AUM.” No, the point is that our audience is losing assets.   

And guess who supports that group seeing shrinking AUM?  Equity research analysts.

Why are there sellsiders and stock-pickers on CNBC all day long?  Because they don’t have anything better to do, and their intellectual property isn’t generating “alpha.” No wonder a bunch of sellsiders have become IR people.

Our profession is missing the ACTION in the fund-flows data. We talk about ESG, targeting, running a great IR program, etc.

We should be understanding and responding to what creates shareholder-value. It’s there to see. A great IR program now is the same as before: One that drives shareholder-value.

What’s transformed – as evidenced by fund-flows – is what creates shareholder-value. We create shareholder-value now by fostering the characteristics money buys for tracking averages. We can’t drive shareholder value by targeting investors whose assets are shrinking.

Should you stop targeting investors? Well, does it work? Where’s the DATA demonstrating that investor-targeting drives shareholder-value? No, characteristics like market cap, sector, volatility, liquidity, value, growth, drive shareholder-value. Size does. Catalysts do – but only 1% of stocks have them.

What sets your stock’s price? An algorithm. The stock market is 100% electronic, and at least 98% algorithmic. Rules govern every tiny aspect of how orders to buy and sell stocks are handled, routed, executed.

Half the money is motivated solely by that process.  If half the money behind your price and volume is of that ilk, with an investment horizon of a day or less, then your price half the time reflects that horizon.

Won’t prices always return to fundamentals?  How would they unless the REASON money buys and sells is fundamental?

If investors at Blackrock raise their average allocation to equities from 35% to 40%, Blackrock doesn’t care about valuations of stocks.  It cares whether the stocks are available, stable, and liquid, so it can increase its exposure. Money thus goes big.

The QQQ. Blue chips. Big stocks.

TSLA, META, NVDA, AAPL, MSFT, GOOG/L, AMZN are $14 trillion of market cap, over $100 billion of daily dollar volume. Minus a more volatile TSLA, these stocks have 1.2% daily volatility, and average 37% short volume (of total volume).

Half the risk and twice the liquidity of the broad market.

Passive money wants size, liquidity and low volatility. That’s what drives shareholder-value. Do the things that enhance liquidity, reduce volatility. If you’re large cap value, large cap growth, say so in every release (state what makes you the same as other things, not what makes you different).

And there’s no reason for large caps to court the buyside or sellside. You already have what the market wants, and 95% of large-cap stock-pickers don’t beat the S&P 500. They charge more than the six basis points that buying the market’s performance now costs.

Buying the market is cheap because BEING the market is easy. Own big stocks. It’s what indexes do.

If you’re a small cap? Same rule. Highlight what characteristics you share with others (like smallcap healthcare growth), not what sets you apart. Help your c-suite build a plan to get to $5 billion of market cap. Into the Russell 1000.

We create shareholder-value by deploying shareholder-capital to create what the market wants. The market does not want volatile outliers. It wants big, stable, liquid stocks.

Will this be the year you change your thinking about what constitutes investor-relations and how you create shareholder-value?

If you want help rethinking the earnings cycle, fashioning a plan for creating shareholder value, let us know. It’s that kind of year.

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