Technology’s potential to ‘emerge’ markets

Earlier this year, one of the largest remaining ‘closed’ emerging markets, Iran, followed Saudi Arabia in opening up its stock market to foreign investors as financial sanctions were officially lifted following last year’s breakthrough nuclear deal between Iran, the US and other world powers.

Emerging and frontier market fund managers are now looking closely at Iran to evaluate its investment potential, as shown by the rapidly growing number of Iran-focused funds as well as the increase in investor travel to Tehran during the last six months. The Tehran Stock Exchange already has a large, diversified and liquid stock market with more than 400 listed companies and a market capitalization of around $90bn. On top of this, the country’s IPO pipeline is potentially as large as $100bn, an enticing prospect for international investors looking for growth opportunities.

Before they are able to invest substantially in Iran, investors must first satisfy internal compliance teams by getting to grips with a market where investor relations and corporate governance standards still have a lot of catching up to do. This is usually a long and fairly painful process as investors, companies and regulators move at different speeds, speak different languages and follow different practices.

Technology could play a vital role in helping companies in countries who are entering the global capital markets arena for the first time, such as Iran and Saudi Arabia, to integrate and engage with the international investment community. It’s probably fair to say that the success of technological innovation in this area will be based largely on its ability to help companies to level the playing field between global investors and local investors.

The investor relations community has been slow to embrace innovations which are already revolutionising other industries. A Google Street View of the Emirates Airbus A380 for example gives travellers a full virtual product tour of the plane from their desks. Bernie Sanders used the 360 interactive video to great effect at his rally in the run-up to the Iowa caucus.

For most fund managers, there is no substitute for a face-to-face meeting or a company site visit, during which they can see the whites of management’s eyes and walk around the corridors of the company’s headquarters. But as global portfolios become more and more diversified, technology could help investors to cover more ground by increasing the effectiveness of ‘remote’ engagement at a fraction of the cost. Forward-thinking IR teams could adapt 360 technology to enable analysts and investors to interact not only with company premises, but also with senior executives and product managers. In a few years, the Oculus Rift headset could take this idea a step further to provide an even more immersive experience.

Simple smartphone applications allow ordinary consumers to order taxis, find dates, book flights, order takeaways and operate their central heating from the office. They allow warehouse managers to control stock and doctors to monitor patients’ blood pressure. At the same time, IROs and fund managers still rely heavily on emails, phone calls and business trips to conduct most of their daily tasks, which require time, money and organisation. In this environment, it is perhaps unsurprising that the process of building knowledge, trust and confidence in a company or market takes as long as it does.

For innovation to be embraced, it must make the fund manager’s job more efficient without forcing him to surrender his competitive edge or limiting his access to the company in any way. It must help the IRO to tell the company story more efficiently and to a wider audience. The opportunity for such a solution is perhaps greatest in emerging and frontier markets given the lack of existing IR infrastructure and desire for short-term international growth. Despite still being relatively undeveloped from a global capital markets point of view, countries such as Iran, China and Indonesia boast increasingly tech-sophisticated consumer markets, which perhaps bodes well for their respective corporate counterparts.

Technology innovations could offer open-minded IR teams in emerging and frontier markets a unique chance to quickly close the gap between them and their richer, more experienced developed market rivals. The lack of an existing process for engaging with international investors may even give them an advantage over established companies reluctant to think outside the box and adapt.

This article first appeared in the spring edition of UK IR Society’s magazine ‘Informed’.

A New Frontier in Financial Technology

This is re-print of a piece that first appeared in Technology Viewpoint in IR Magazine edited by Michael Chojnacki from Closir.

There’s something different about Level39. Europe’s largest financial technology accelerator opened two years ago in the heart of London’s Canary Wharf with the explicit aim of supporting the next generation of technology start­ups. Most of the growing number of entrepreneurs on Level39 left their jobs in the City to try to solve industry problems their employers and competitors had little appetite to address, following the vast reduction in R&D and technology budgets post­ 2008.

Working in small, agile teams and freed from the internal approval process, the next generation are quickly rising to the challenge. This hasn’t escaped the attention of the large banks and sector players, who monitor the market closely, often looking to partner, invest in or buy from the new kids on the block.

Why should we care? Because the technology developed by entrepreneurs in places such as Level39 will play a fundamental role in shaping the IR industry during the next 10 years. It will dictate how shares are traded, cleared and settled. It will influence the composition of shareholder bases. It will govern how we develop and maintain relationships with investors and analysts. It will impact our access to information that helps us to make intelligent strategic decisions. The most relevant areas of innovation can be broadly categorised into six key themes:

  • Fragmentation of Investment Research 
  • Technologies in the Capital Raising process 
  • Data Science and Analytics 
  • Democratisation of Corporate Access 
  • Development of Trading Technologies 
  • Evolution of Marketplaces and Support systems

Today we would like to address the first topic.

Fragmentation of Investment Research

Before setting up Stockviews, Tom Beevers spent nine years as a pan­ European portfolio manager at Newton, a London based investment manager with over $75bn in assets under management. Like many of his colleagues in the industry, he was a heavy consumer of research but became frustrated with the lack of variety of perspective. As a result he often found himself searching through online forums, blogs and social media for other viewpoints. Seeing an opportunity, he founded Stockviews, an online platform that collects equity research from independent analysts (anyone can write research on any stock) and rates each based on the performance of their past stock picks. This is potentially an interesting development for IR teams. It means that existing sell­side analysts may soon have to make room for the growing number of independent analysts whose views are followed and respected by thousands of followers. It certainly wouldn’t harm IR teams to keep the top­performing analysts on their radar and perhaps even engage in periodic dialogue with them. A fresh perspective can be helpful and innovative ideas like Stockviews are a good way for companies and investors to broaden their horizons.

Wisdom of Crowds

The growing trend towards group opinion platforms is testament to belief in the wisdom of crowds. In 2014 researchers from Purdue University, City University of Hong Kong and Georgia Institute of Technology published Wisdom of Crowds: The Value of Stock Opinions Transmitted Through Social Media. The authors analysed approximately 10,000 articles and comments on a popular social media platform for investors called Seeking Alpha. Its ability to predict stock returns and earnings surprises was much higher than expected, supporting the case for independent research. Others platforms which gather research, estimates, or opinions about listed companies include Estimize, SumZero and Value Investors Club.

Influencers of this trend

Another factor sell­side research teams have to contend with is the new wave of regulation governing payment for research and corporate access services. The proposed EU regulations are expected to severely limit the degree to which fund managers can pay for research out of trading commissions, thus resulting in fund managers having to pay for research out of their own P&L. With investors hesitant to pay out of their own pockets it becomes uneconomical for brokers to cover a long tail of mid and small­-cap stocks. Institutional investors are increasingly setting up their own in­-house research teams, further exacerbating the problem.

In light of the inherent conflict of interest in the current model, the key words behind the latest regulations are ‘accountability’ and ‘transparency’. New market players are increasingly utilising social technology as a tool to level the playing field and democratise the research process. But do social finance platforms have a role to play in the professional investor community? This question was posed at last summer’s annual CFA conference in Seattle. The strong consensus was that online crowdsourcing communities can be very useful, particularly to investors with less access to sell­side analyst reports or those looking for a different perspective. If technology driven platforms continue to make the investment process more efficient and inclusive, they will no doubt become a serious challenger to current industry standards.

What ValueStream Investment Means for Closir

Today we are delighted to announce a strategic investment and partnership with ValueStream Labs in New York. ValueStream is a venture capital firm specialising in financial technology and this is their first European investment.

This news is really exciting for us and the users of our platform. First and foremost, the partnership will will help to extend Closir’s network to the US institutional investor space, who represent the largest opportunity pool for Emerging Market issuers. Over the years, US investors have been steadily diversifying their portfolios and increasing their exposure toEmerging (and Frontier) Markets. The main beneficiary of this trend from the early 2000s has been the BRICs; slowly this has expanded to encompass the 23 counties within the MSCI EM index. The scope of US institutions investing in EmergingMarkets is also quite broad, from mutual, pension and hedge funds to endowments, separately managed accounts and awidening range of passive tools. These institutions are constantly on the lookout for better ways to learn about new opportunities and Investor Relations is at the heart of telling this story.

Developed Market Holdings in Emerging Market Equities, Source: IMF

Screen Shot 2015-06-03 at 12.51.49

While our initial focus is on issuers in Emerging Markets and institutional investors in the US and Europe, our goal is eventually to help any investor to learn about and access any global opportunity. We are convinced technology can deliver a better experience for this process.

ValueStream has experience supporting the growth of a number of successful technology ventures and we are proud to be part of their portfolio as we continue to develop our solution.

Michael Chojnacki

Chief Executive Officer

@mikechoj

The Economist: The Fintech Revolution

This week’s special report in The Economist on Financial Technology (or Fintech) talks about the new wave of ideas changing traditional finance, from payments to wealth management, crowd funding and digital currencies. Fintech start-ups continue to attract record investment year-on-year from the venture capital community, and many are long past the experimental phase. The report also discusses the uncertain and evolving relationship between fintech and traditional banks.

As we have pointed out in some of our previous posts, despite the fact that many of the most relevant trends in this space are still nascent or emerging, there is huge potential for them to impact the asset management industry and subsequently our world of investor relations.

For those fairly new to the subject, you may find our basic Fintech Dictionary useful in explaining some basic concepts and definitions.

A few points from the Economist report in particular caught our attention:

  • Although the amount of assets managed by automated wealth managers (so-called ‘robo-advisors’) doubles every few months or so, the global total is still only around $20bn, compared to roughly $17tr for traditional managers. The argument in favour of robo-advisors, which mainly utilise indexing strategies while staying clear of mutual funds and individual stocks, is that they can use algorithms to provide sound investment advice for a fraction of the price of a real life advisor. The majority of the take-up so far has been from clients under 35 with an average account size of less than $100,000. It is interesting to note that Schoders, Goldman Sachs, Vanguard, Schwab and JP Morgan Chase have all either made direct investments in robo-advisory platforms or are planning to launch their own.
  • The electronic ledger ‘Blockchain’ is the technology behind the digital currency Bitcoin. Blockchain offers a decentralised, public account of all Bitcoin transactions. Enthusiasts believe its application in the financial markets may be much broader; in theory the technology could be applied across a wide range of applications, such as the issuance and trading of securities. Unsurprisingly, a number of large financial institutions, as well as exchanges, have taken steps to explore this further.
  • Providing financial services to millions of customers, especially to those in populous emerging markets in Asia and Africa who previously had no access to them, is another area that fintech looks to address. While only 25% of people in Africa have access to a bank account, over 80% have a mobile telephone. Taking advantage of this gap is M-pesa, a Kenyan phone based payments scheme now used by three quarters of adults in the country. As these concepts evolve it is fascinating to think about the possibilities and applications for providing credit, retirement and investment solutions to millions almost overnight.

We will continue look at some of these ideas in more depth over the summer.