Allocating capital and stewardship | CFA UK

Monday 18 July 2016

Panel discussion with Will Goodhart, Chair; Will Nicoll, CFA, co-head of alternative credit, M&G Investments; Trelawny Williams, global head of corporate finance, Fidelity International; Deborah Gilshan, head of sustainable ownership, RPMI Railpen; Sue Scholes, chair, Investor Relations Society; Philip Broadley, past group finance director, Old Mutual plc and Prudential plc

WILL GOODHART: How does the investment profession do in terms of its contribution to the effective allocation of capital?

WILL NICOLL: I work on the debt side of the business, but there was clearly a rapid and vast change after 2008 when Lehman’s went bankrupt. Before that if you had asked investment managers how much involvement they had with their companies and how much they talked to their companies, the answer would be pretty low, in Europe. I would make the case that investment managers in the last eight years have shown enormous flexibility in trying to help with these problems. I just want to give one example. There is a market in the UK for long term lending to social housing groups. All of that is 30 year lending, it’s very dull, mortgage-based lending, and all of that was done by the banks.

It was a 100% bank funded market, of about £60 to £70 billion, done very quietly. In 2008 that stopped, because the banks just couldn’t provide the funding, and the regulation stopped the banks from being able to provide funding in the long term. Very quietly, and with no regulatory interference, that has been 100% percent replaced by investment managers. If you allow the market to evolve – and as the investment banks and the banking sector pulls away from a lot of company financing – then you see a sensible replacement in a lot of markets. That is a small microcosm, and we’re seeing small markets like that grow in large number of areas which I think is an encouraging sign.

GOODHART: Trelawny, an improvement in performance driven by necessity and circumstances. Is that fair or unfair?

TRELAWNY WILLIAMS: I think the quality of communication between companies and their investors is pretty good actually, and it’s a lot better than it used to be. I first went into corporate governance back in the mid-90s, and one forgets how much the world has changed. There was a poor appreciation of what shareholder rights were, and the role of shareholders on boards was as a passive agency with minimal input. I think we now have a much more interactive relationship.

I like to think it is a discussion between grown-ups, it’s a lot more sophisticated, and companies have well staff IR teams now. My only concern is that it has almost become too slick and too smooth, and where there is a difference of opinion between shareholders and companies, the companies can be quite good at nominally agreeing with what you are saying, but actually doing something different. But nonetheless you have to recognise where you come from, and I think the quality of discussion is pretty good.

GOODHART: Sue we’ve talked about this a little bit before. You feel that there has been an improvement?

SUE SCHOLES: Both from a personal perspective and in my years in investor relations, there’s definitely been an improvement, and when we survey our members about the degree to which the stewardship code is implemented, they point to some improvement. There are a couple of things I’d say that might just add to the debate. When we talk to smaller companies within our membership, they talk about the difficulty of getting that dialogue. They find it difficult to find their voice. 

If you have something that is under 1% of the company it is difficult to find the time to engage with those people. We have also seen a situation where it is more normal for best practice investor relations to have more in-house internal expertise. But at the same time we have seen the corporate broking environment go through a period of change and flux. Once upon a time not very long ago, the company would go to the corporate broker for the advice and that would be the relationship. But another thing we see is that in terms of the engagement we are having with investors, a lot more of it is direct with investors, without that intermediary…article continued in the Summer 2016 issue of Professional Investor [login required].