In our daily interactions with the Swiss investment community we see very little evidence of the arrival of London-based fund managers fleeing the UK to Switzerland so we don’t believe there will be much impact on the targeting efforts of IROs for the time being.

As Bill McIntosh of the Hedge Fund Journal points out in a recent article, as much as 90% of the European industry’s $300 billion plus in assets is managed, directly or indirectly, from London and it is likely to stay that way.  He explains that “There is a lot of talk, not too much action,” but points out that “anecdotal evidence suggests that many small-to-medium sized firms are also looking to enhance their operational flexibility.  One thing that is occurring, according to a leading prime broker, is that firms are exploring setting up a management company in a more tax efficient locale. This is seeing some funds set up a second leg in Switzerland but still keep London as the main operating centre. Though London is expected to be the top European financial services hub for the foreseeable future, hedge fund principals can decamp to build a second leg but still visit the UK weekly or fortnightly, thus escaping the clutches of the Inland Revenue.”

He goes on to point out that “Another spur for setting up a Swiss office is to take advantage of the light regulatory structure. At a time when regulatory upheaval is a certainty in both Europe and the US, the Swiss system’s use of referenda means that change, if it comes, will be slow. But it could be tricky to decamp completely from the UK in case the AIM directive puts heavy restrictions on non-EU funds. So it seems likely that firms will want to guard their EU regulatory optionality by keeping a London presence. Having dual offices thus gives a fund a regulatory toe-hold in each system.”

“Consultants and managers note that life style, too, is a key consideration. Firms that canvas their partners about moving abroad often find it difficult to convince wives and family to rip up their lifestyles and relationships. The Swiss Alps may be beautiful and have their fans, especially among partners with young families, but the cantons around Zurich can be tough socially for non-German speakers. And Zurich, whatever its charms, pales beside London as a cultural and entertainment centre.”

“Nor should it be forgotten that Switzerland is itself badly bruised from the credit crunch. Private bank customers in Geneva lost an estimated $7 billion in Madoff and many funds-of-funds in the city are still bleeding. The woes that have afflicted UBS have ensured that Zurich, too, has felt the pain. Moreover, capital is flowing out as tax amnesties in Italy and Germany encourage investors to bring money home.“

Talk of London-based hedge fund exodus to Switzerland is exaggerated.  Indeed, the fall of sterling against the euro and the Swiss franc even gives the UK a competitive cost advantage.

In 2006 two Yale academics (Cremers, M. and Petajisto) introduced the term Active Share as a measure of active portfolio management.  The term measures the degree of overlap in holdings at the stock level between the fund manager and their benchmark index.  An Active Share of 100% implies zero overlap with the benchmark while a pure index fund will have an Active Share of 0%.

Unfortunately, as shown in the chart below, Active Share has been declining over time which means that many funds are increasingly mirroring their index.  This is due to the increased use of passive investment techniques but also because of the widespread use of benchmarks by active managers.  The rise of these “Closet Indexers” is an issue for IROs when considering which investors to target.  This is especially important as many so-called “Active” fund managers may actually be “Closet Indexers” who will typically only overweight or underweight their positions very slightly.

Spending valuable management time with a “Closet Indexer” will have little impact on marginal additional purchases of stock.  Therefore, it is clearly very important for IROs to be able to identify the stock pickers with concentrated portfolios in order to achieve the most from their meetings.

A great deal has changed in the IR world over the last 15 years but we were surprised how much remains the same when our long-time client Mark Steinkrauss stumbled over an article from 1991 discussing European IR for U.S. companies.  The article (see below) highlights the difficultly in indentifying shareholders beyond the meager public filing information and the lack of European sell-side research coverage of U.S. stocks.  Interestingly enough, our biennial European Stock ID survey, according to the article, only identified around 50 UK and European funds holding U.S. stocks in those days.

Today we often identify more than 400 institutional holders of U.S. stocks in our biennial surveys, and it’s not unusual to find 10 – 15% of a company’s capital held by European investors. The one other major change has been the distribution of materials which was by post or fax in those pre-internet days.  Although the European single market has developed considerably, for IROs it remains a series of separate markets in many ways.

The article can be found here.

(Belga) – Une étude récente de la Société Générale révèle que les actions du New York Stock Exchange (NYSE) restent en moyenne neuf mois dans le portefeuille d’un investisseur. Dans les années ’40, le laps de temps moyen était encore de 10 ans.

A la bourse de Bruxelles également, les investisseurs ne semblent plus être si confiants. Vingt ans auparavant, les actions belges restaient dans un portefeuille cinq ans en moyenne. En 1999, cette moyenne était tombée jusqu’à 20 mois. Depuis, la durée se situe, pour les plus grosses actions, aux alentours des 1,5 et 3 ans.

Les actions de l’indice Bel 20 changent tous les 17 mois de propriétaire. Ce chiffre est fortement marqué par le véhicule boursier d’Albert Frère, NPM, qui reste en moyenne plus de cinq ans dans les portefeuilles. Si NPM n’est pas repris dans ces statistiques, la moyenne pour le Bel 20 tombe à 14 mois, un record.

Selon le quotidien économique, la crise joue ici un rôle important. Le démantèlement de Fortis a plongé les investisseurs dans une nervosité extrême. Bon nombre de vendeurs en panique se sont ainsi retrouvés face à une multitude de spéculateurs opportunistes. En outre, les fonds spéculatifs jouaient il y a plusieurs dizaines d’années un rôle beaucoup plus limité en bourse.

While meeting with investors in Paris this week, several raised the question whether the U.S. stimulus is working yet.  Most corporations are certainly not yet seeing any direct benefits and the worry on investor minds is that the markets are getting way ahead of reality because the stimulus is only going to start trickling down to companies next year and the real impact on corporate earnings will not show up until 2011-2012.

I’ve just come out of a session about the changing role of the sell-side and must say how surprised I was to hear so much bashing of the sell-side.  Clearly their business model is under a lot of pressure given the current environment but the sentiment in this very well attended session (standing room only) seemed to be against using the sell-side to facilitate corporate access because they no longer do a good job, don’t deliver the right investors and can’t get good feedback from PMs.  One of the speakers from the buy-side said they never tell the sell-side what they think about meetings.  One IRO stood up at the end of the session and said he was completely confused by the whole situation.  Strangely enough, the session next door on corporate social responsibility was not as well attended as it probably should have been.  What does this tell you about the issues most on everyone’s minds?