Aberdeen manager cautions small caps over sell-side focus
Small-cap companies are sometimes relying too much on the sell side, warns Ed Beal, senior investment manager at Aberdeen Asset Management and a judge for the inaugural IR Magazine Forum & Awards – Small Cap Europe.
He describes it as ‘disappointing’ when IR teams ‘see their role as communicating with the sell side and using that as a conduit to the market. Related to that we are uncomfortable with the notion of sell side-only events and capital market days.’
In fact, Beal says Aberdeen Asset Management, which has £312.1 bn ($431.2 bn) in assets under management, is ‘sometimes a little skeptical of the requirement for dedicated IR functions at smaller companies’ altogether. ‘The nature of these businesses often makes it a relatively simpler job for investors to develop a fulsome understanding of them,’ he tells IR Magazine.
Although many smaller companies rely on external IR – or completely outsource the IR function – Beal emphasizes the need to put the C-suite in meetings. ‘Executive managers should be able and willing to engage with investors: we see that as a fundamental part of their role and we have reservations where this is, in effect, outsourced to an IR department, be that internal or external.’
Small-cap management attends a greater percentage of investor meetings – 60 percent on average – than any other cap size, according to research from IR Magazine (see the soon-to-be published report Senior Management IR Practice.)
That doesn’t mean IROs don’t have a role to play, Beal adds. ‘We accept that additional points of investor contact within a business should be a benefit to both the company and investors. We look to IR to provide us with the resource to develop a really thorough and detailed understanding of a business. To let us ask the ‘beginner’s questions’ as well as the deep dive detail. [But] we do not want to be directed to them to discuss strategy, for instance.’
What IROs should be doing, says Beal, is easing access to senior management, something he says Aberdeen would prefer was done directly rather than via a broker if possible. ‘We see value in IR departments that secure us the access to the executives we require, thereby [saving] us [from] having to go via the broker and allowing us to strengthen our direct relationship with the company,’ he explains.
Beal would also prefer a direct conversation with companies rather than the surveys he says are often ‘undertaken by external parties at the behest of IR’, which he says tend to be too generic to be useful: ‘The opportunity to give a nuanced answer is missing and we’d rather speak with the company directly.’
Another area Beal sees as a key element of the small-cap IR role is in communicating the different requirements and perspectives of various investors – and ‘what can seem a complicated and often contradictory set of messages’ – to senior management and the board.
A key challenge for European small-cap companies, says Beal, is the ‘perennial issue of them being viewed as inherently riskier than their larger counterparts. While a leftfield event can have a significant impact on a small company, the perception that they are as an asset class riskier is, to our mind, misplaced.’
What small-cap companies need to be doing is better communicating the message that they’re not inherently riskier, says Beal. ‘Allied to this is the fact that small companies are, out of both necessity and opportunity, more internationalized than they have ever been and this should be a more attractive proposition to investors,’ he notes. ‘Again, this needs communicating.’
Finally, he notes that rising interest rates across the region could be an issue. ’Whereas traditionally that would signal economic recovery and a likely more favorable environment for small caps, this time the companies have had the share price recovery – and, to a degree, the trading recovery – ahead of the interest rate cycle,’ he explains. ‘Therefore, rising interest rates could have a negative effect if they presage a risk-off mentality among investors that assume the end of the recovery period is getting closer.’