Mapping transparency: A world tour of shareholder ID
From
IR Magazine:
A prerequisite for good investor relations is knowing who your shareholders are. In an ideally transparent world, companies and investors would be able to reach out to each other for AGMs, corporate actions or simple feedback through direct communication lines. In reality, large-scale institutional ownership added to the custodial holding model make the identification process highly complex, and in most countries there is little legislation to underpin this often arduous task.
An attempt at transparency was made in the 1970s when the US introduced 13F filings, whereby funds make their holdings public every quarter. This data is then published into the Edgar repository and repackaged for the likes of Bloomberg or Thomson Reuters.
The system presents a certain number of flaws, highlights Mark Simms, CEO of London-based advisory CMi2i. First of all, funds are unhappy about their holding positions being made available not only to corporates but also to their competitors. The statement, which can be made up to 45 days after filing, is more often than not an outdated snapshot, especially if the fund has high turnover. In addition, there are variations in terms of filing for international securities, with some quarters dealing with ordinary stock and some with ADRs. If a US issuer struggles to know who owns its shares, being a non-US firm just adds to the complexity.
This is why most service providers in the arena are highly specialized geographically. ‘Having a depth of knowledge of the share register landscape and regional ownership patterns – including knowing where the bones are buried – provides 90 percent of what is typically needed to perform effective shareholder ID in a non-disclosure market,’ explains Lucas Scheer, president of New York-based LS Global, which caters mostly to Asian firms. ‘Being able to conduct an effective research campaign and targeting the appropriate institutions to contact during a short timeframe provides the rest.’
Full disclosure zones The UK legislation, created in the mid-1980s and replicated in nearly a dozen countries, aims to counter those inadequacies by giving issuers the legal right to know who has a beneficial interest in their company. The problem lies in how shares are held, Simms explains.
What appears on a company share register is the nominee, usually a custodian hired to hold shares on behalf of institutions. A global custodian may have 4,000 or 5,000 different funds as clients, and they’re not obliged to disclose more than the minimum information: what the shares are and what the account is, sometimes just in the form of a code. ‘And what you may be sitting on is not a fund at all but another layer of custody, and another…’ Simms warns.
Once you’ve gone through the custody channel, the fund identified may be a pooled account, holding on behalf of numerous different funds, a designated account or a one-on-one account. ‘Take the British Airways pension fund, for example, where money is managed internally: British Airways would be the beneficial holder,’ Simms says. ‘At Dutch pension fund APG, some of the money is externally multi-managed, which means APG is not the investment decisionmaker, so there’s no use interacting with it.’
Establishing where the vote goes can be equally challenging. ‘The votes could go to the beneficial holder, to the asset manager or to the multi-managed fund,’ Simms says. ‘They could be loaned out with a contract for difference or tied up in a prop desk, in a prime brokerage account. So you have to create this mapping table that goes through layers of complexity.’
Once the identification is done, the information has to be reconciled through the clearing houses and the layers of custody back to lists on the vote or share register, a lengthy process that at least has the benefit of being supported by a legal framework. ‘If you’re a US corporate, you can’t do any of this,’ Simms notes.
Most advisers take a mechanical approach to the analysis work by putting in place a straightforward process. ‘We make it easy for the custodians to respond to us,’ explains Alison Owers, CEO of Orient Capital, a global IR consultancy. ‘Getting the granularity is not a problem because of our methodology around it. If there’s a challenge for us as a business, it’s the demand, so we have to make sure we can maintain the quality. For the industry, the issue is often about ensuring the custodians can – and do – comply.’
How hard is it to get to the bottom of your investor base? Part two
Sitting between the fully transparent markets and the more opaque ones are a large number of countries with share registers and sometimes relevant legislation, but often no penalties to enforce them. For those jurisdictions, consultants perform shareholder ID rather than global shareholder analysis, which is possible only in countries with full disclosure laws.
‘France is one of the better countries, with the domestic funds visible on the Titre au Porteur Identifiable register, and the Nouvelles Regulations Economiques legislation, which applies to international funds,’ Simms says.
Companies in Belgium, Greece, the Netherlands, Spain and Sweden have their shares held in a domestic central securities depository, which is structured around directly registered nominee accounts. Issuers can request a list of their shareholders from the depository, some of which proactively send out regular reports to companies. Again, however, the way shares are held can compromise transparency.
In Sweden, for instance, the disclosure obligation does not extend beyond the second layer of nominee account ownership, so there is no legal way to get the name of the beneficial owner. In Italy, there is a disclosure law with no penalties, and issuers can request identification only in the context of a corporate action. In Spain, firms enjoy a daily brief from the local clearing house about trading activity in their shares – but only domestic investors are named, and intermediaries appear without mention of the underlying foreign owners.
Some visibility on international investors can be gained in Spain and Italy, where investors need to register if they want to vote at an AGM. ‘In Switzerland, where no share register is available, you have very little to work with other than filings, so that’s rebuilding the ownership structure without a map,’ Scheer points out.
In Germany, there are two different systems depending on the type of stock. ‘Companies with registered shares – usually in strategic sectors such as banking, infrastructure or industrials – can adopt the disclosure regime of Section 67, whereas bearer shares need to follow the shareholder ID route,’ Owers says, adding that the country has been more hesitant in adopting the legislation. ‘It’s a powerful tool that IR teams could really benefit from but it’s not being used as widely as it could be.’
Mainland China has a unique market structure where all shares are held in a state-controlled depository that requires both retail and institutional domestic investors to register by name. Corporates receive a monthly report on movements in their shareholder base, though investors trading through the Qualified Foreign Institutional Investor program don’t appear, as only the name of custodial intermediaries is disclosed.
Shareholder ID is a less rigorous methodology than shareholder analysis, in the sense that research is carried out top-down instead of bottom-up: the process starts with a register, then works its way through the nominees to the beneficial owners, and is finally completed with data from various information sources to bring it together in the form of an analysis. ‘There’s a challenge in ensuring all the sources you get are accurate and that you’ve got the right team in place to be able to understand, read and ultimately translate the data into really useful information for the company,’ Owers says. ‘So there’s always more of a caveat attached to it.’
Stock surveillance versus shareholder ID
In the US stock surveillance looks at movement of money through the Edgar filing mechanism and voluntary disclosure from the institutions, which are quarterly positions from the funds filed up to 45 days later. The surveillance method compensates for the time lapse by directly interrogating portfolio managers on their positions.
‘Compliance departments of most major custodian banks long ago ceased to provide bank lists or shareowner records following heightened pressure from their institutional customers to discontinue doing so,’ explains Lucas Scheer of LS Global. ‘But numerous global asset managers that we contact for share positions in our client companies have their compliance departments regularly respond to our requests if we provide proper authorization from them.’
In the UK, the equivalent of stock surveillance is daily transaction monitoring. ‘Most of our clients from the FTSE 100 run a monthly analysis,’ says Alison Owers of Orient Capital. ‘We also provide it on a daily basis for companies that may have had some interesting movements in their shareholder base and want to actively monitor it.’
Because information comes from front-office contacts and not from compliance, stock surveillance can often be viewed as an art form. ‘You can extrapolate and make assumptions but it’s not scientific, in my opinion,’ says Mark Simms of CMi2i.
How hard is it to get to the bottom of your investor base? Part three
Here is a recap of how issuers can identify their shareholders in different zones:
Fully transparent: Shareholder analysis – The legal way
Australia, Hong Kong, Ireland, New Zealand, Nigeria, Norway, Singapore, South Africa, UK
These countries have adopted a variant of the UK’s legislation based on Section 793 of the Companies Act, a law designed to give an issuer the legal right to know exactly who has a beneficial interest in its shares at a given time. A company can approach any body it thinks might be a shareholder anywhere in the world and require it to disclose its position within three working days. Noncompliance is a criminal offense that can result in a disenfranchising penalty (withdrawal of voting rights and dividend) and in some cases a buyback of shares. Based on this legal framework, advisers hired by issuers can perform accurate, disclosure-enabled shareholder analysis.
Highly to moderately transparent: Shareholder ID – Working from the register
Belgium, China, Denmark, Finland, France, Germany, Greece, India, Portugal, Russia, Spain, Sweden, Switzerland
There is relative transparency for issuers in these countries, where shares are commonly held in a domestic central securities depository. But while some countries have introduced proper laws – though often without penalties attached – others haven’t put disclosure obligations into legislation. Access to the register may require a tedious process, and identifying foreign shareholders can be difficult when only custodial intermediaries are made visible without any mention of the beneficial owner. Uncovering the names of those investors requires additional information gained through detective work.
Low transparency: Stock surveillance – Digging into the filings
Canada (National Instrument 54-101), Japan, US (13F)
US companies get information on their shareholder base via the quarterly Edgar filing made by investment funds. There is no disclosure law, so companies rely on data from the public domain and elective disclosure from a minority of non-objecting holders. Different filing rules apply for mutual funds, pension funds and insurance funds, which can lead to companies overlooking important holdings. Canadian firms are in a similar situation, although there is no filing requirement for investors. Japan is another non-disclosure country. While shares are directly registered in nominee accounts at the domestic depository, issuers have no legal recourse for requesting identification of the underlying beneficial owners. The foreign shareholders behind the nominees are often hard to uncover and shareholder ID will be a process of identifying the custodian or nominee name change made by the investor. As a result, performing shareholder ID in non-disclosure markets will rely even more on direct contact with the buy side.#
How hard is it to get to the bottom of your shareholder base? Part four
Most companies will engage in shareholder ID at least once a year when their fiscal year ends, three months prior to their annual general meeting, in order to capture the voting rights. This approach means any activist shareholders may also be identified, and any potential problematic issues or threats coming to the meeting can be overseen in advance by the board.
‘We can understand when an activist investor may be amassing a small stake and give our clients a probability as to whether [the activist is] holding a position or not, based on the ownership patterns we recognize,’ Scheer says. ‘Different hedge funds use certain prime brokers in certain markets and seeing the group of them come up and leave together is certainly one strong indication, pointing to a name that might be a threat. It’s something that’s so very nuanced and specialized that you need to be an expert in a certain market.’
About a third of Simms’ work is commissioned in the context of a transaction, be it a hostile takeover, activist attack, straightforward M&A deal, spin-off or delisting. ‘If you’re in a deal, you can have percentages making the difference as to whether it goes through or not,’ he stresses. ‘Without this forensic analysis, you can lose out on a technicality because someone hasn’t been identified. But you could need ID for as simple an event as a company moving sectors, or reaching the top of its growth curve: when that happens, all the sector or growth funds, respectively, will sell out.’
Thanks to the impact of corporate governance and initiatives such as the European Union’s newly updated Shareholders’ Rights Directive, the market should get more and more transparent for the issuer over time, Simms believes. Eventually companies may get to a point where they have a full view of their investor base.
‘That’s the golden goose, what everybody’s after,’ he says. ‘The best [others] will see is in the public domain but I wouldn’t rely on that. What they’re never going to see is who’s got it and how they’re holding it: that will only be available to the corporate itself.’
Beneficial interest: The big short
Short positions are notoriously hard to get disclosed, though there has recently been a push for more transparency about derivatives such as contracts for difference. ‘Our approach allows us to spot the clues to what could be going on behind it,’ says Alison Owers of Orient Capital, who regrets there isn’t more disclosure around short positions. ‘There are rare examples of disclosure but unfortunately, that’s not the way the legislation is set up to work right now.’
Analysis of the share register can help confirm shorting suspicions. Several institutions, especially passive investors, are renowned for lending their shares for a profit, explains LS Global’s Lucas Scheer.
‘We can tell the difference between stock lending and actual stock selling by a fund when the filing reveals a much larger position than the custodian shows in the share register,’ he says. ‘We recognize when a popular sovereign wealth fund has its shares loaned, for instance, when its shares are not fully voted at an AGM because many of them are on loan at the time of record date. It’s a matter of interpreting the patterns we see in numerous cases.’
Activism Takes Root In Japan by Activist Insight
ValueWalk BusinessStart to believe the hype: the number of companies targeted is set to more than double this year
The number of Japanese companies publicly subjected to activist demands reached 13 in the year to July 31, compared to 8 in the whole of 2015.
Despite much talk of a prospective increase in activism, mainly following activist investor Dan Loeb’s forays into the country, the level of activity has been broadly stable, with 7 companies publicly targeted in 2013, rising to 8 in each of 2014 and 2015 (activist short-sellers excluded throughout). Although proxy season has now passed for this year, activists are continuing to view the environment as favorable to activism, as recounted in the Activist Insight Monthly August 2016 cover story, Activism in Japan.
Activism Takes Root In Japan
Companies subjected to public demands by location of headquarters. *Year to 31/07/2016
The rise in activity has been driven by interest in the small-cap sector (US$250 million to $2 billion), where more than half (7) of the companies publicly targeted this year have fallen. Only one company with a market-capitalization of more than $10 billion has been publicly targeted this year, compared to three in the whole of 2015.
Balance sheet activism continues to be the dominant category for public demands, with M&A activism falling from as much as 22% of the total in 2013 to just 5% in the year-to-date. Governance-related demands have increased to 32% of all actions, up from 11% in 2013.
Activism type as a proportion of all public demands.
As in previous years, activism continues to be a largely imported phenomenon for Japan. (Note: Effissimo Capital Management is recognized in the data as a “foreign” activist as it is based in Singapore, while Murakami and C&I Holding is based in Japan even though its founder, Yoskiaki Murakami, is believed to be a resident of Singapore). The spatial distance between Japanese activists are their targets may be a reflection of the approach of Japanese investors to hostile activism.
Companies targeted by location of activist HQ (for Asia, both activist and target are assessed at country, not regional level).
Commenting on the data, Activist Insight spokesman Josh Black said, “Activism is becoming more common in Japan at the same time as corporate governance standards focused on increasing the independence of the board are becoming more exacting. While still far less common than in the UK, for example, the data indicate that activism can continue to thrive in an economy where returns have been weak – perhaps even more so.”
Hedge funds recover from early-2016 losses, up 1.15%
EurekaHedge Index Flash Update - 12 April 2016
We are pleased to announce the nominees for the Eurekahedge Asian Hedge Fund Awards 2016 which will be taking place at Capella Singapore on 27 May 2016. To acknowledge performers that have yet to be recognised for their efforts, Best ASEAN Fund was added for 2016 - bringing the total to 18 awards this year. Previous additions include Most Consistent Asian-based Fund, Best Asian Billion Dollar Hedge Fund, and Best Female Hedge Fund Manager. View the nominee list here.
Hedge funds recovered part of their losses from earlier in the year and were up 1.15%1 in March as underlying markets represented by the MSCI World Index2 gained 5.47% in what shaped up to be a positive month for global markets. The Fed's decision to roll back further on its scheduled interest rate hikes for 2016, coupled with rising oil prices and monetary easing in China provided much need relief for the markets. As of end-Q1 2016, hedge funds are down 0.52%, ahead of underlying markets as the MSCI World Index posted losses of 1.97%.
Emerging markets mandated managers had a good month as the stabilisation in oil prices and well-performing equity markets in EM countries lent support to managers during the month. Central bank meetings also dominated the news in March, influencing reversals in the markets. Market reversals did not bode well for some CTA/managed futures and macro managers with returns languishing into negative territory during the month as comments made by central bankers led to choppy trading conditions. Policy shots remain a key theme for central bankers as they attempt to jolt the global economy amid a deflationary environment.
EurekaHedge - Hedge Funds outperform underlying markets, up 1.36% while preserving 2015 gains
September 8, 2015 - Hedge funds posted their third consecutive month of losses with the EurekaHedge Hedge Fund Index down 1.75% in August while the MSCI World Index lost 6.66% due to fears over China's economic outlook.
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Major Chinese Investors Have Not Divested Japanese Equities, a Study by LSGA Shows
New York, NY, August 7, 2015 – Chinese sovereign funds have not broadly divested Japanese shares, as has recently been suggested in the Japanese press and speculated on in the investment industry, according to an analysis by LS Global Advisory Group.
The disappearance of shares at registration account SSBT-OD05 by March 31, 2015, followed by a recent media report in Japan highlighting this development, has caused concern in the investment community that one or more major Chinese funds have sold their equity stakes in many Japanese issues. The SSBT-OD05 account has received much attention in recent years as it recorded the significant purchases of Chinese ownership in Japanese equities that began in 2007, according to LS Global’s research. In 2012, according to multiple reports, the assets of this account peaked at an estimated 4 trillion yen ($32 billion) among 167 Japanese companies.
In a recent Nikkei Asian Review article about the disappearance of shares from the OD05 account, TS China Research suggested that China is shifting the government fund into domestic businesses. This report added to the speculation of a broad equity sell-off.
Holdings Have Been Re-Registered, Not Divested
LS Global Advisory Group has found that this is simply not the case. In a special analysis, LS Global, a specialist shareholder identification firm, has studied historic investor holdings in over 40 Japanese companies through March 2015. Through this analysis, LS Global has determined that the portfolios behind the OD05 holdings have mostly been re-registered to other nominees, including an account named SSBT-505080.
“The decline in shares at SSBT-OD05 is being incorrectly interpreted by some as a broad sell-off by one or more Chinese funds,” stated Lucas Scheer, president of LS Global. “What has actually happened is that most portfolios that were previously held at OD05 have been re-registered to other accounts, although there is no single clear pattern. The corresponding new registrations are different, issue by issue, based on the Chinese portfolios that are invested in them. We’ve accounted for the vast majority of the OD05 shares as new registrations for nearly all issues we’ve studied, confirming that there has been no vast departure.”
The LS Global analysis found that much of the recently increased holdings in the SSBT-505080 nominee consist of externally managed sovereign wealth fund (SWF) portfolios. Furthermore, several other nominees have also received Chinese SWF portfolios and other Far East-based beneficial owners which had still been held at SSBT-OD05 prior to March 2015.
Scheer concluded that, “Based on our historical data and understanding of the accounts associated with these nominees, as well as research we’ve performed in other markets, we are confident that the shift out of SSBT-OD05 predominantly reflects a change in registration and not a major divestment of Japanese shares by Chinese SWF portfolios. The major Chinese SWFs and other Far East-based beneficial owners still maintain their core holdings in Japanese equities.”
About LS Global Advisory Group, Inc.
LS Global Advisory Group is a leading provider of Shareholder Identification and market intelligence services, delivered with a dedication to personalized service and responsiveness to client needs. This crucial information helps client companies communicate more effectively with their current and prospective shareholders, as well as with the investment community as a whole. Formed in 2006 by industry veteran Lucas Scheer, the firm is a leader in identifying and analyzing institutional ownership in public companies around the world. LS Global operates across all major industrial countries, and in addition to providing shareholder intelligence and Investor Targeting services, offers a full suite of Global Proxy Services including Corporate Governance Consulting. For additional information about LS Global Advisory Group, please visit our website, www.LSGlobalAdvisory.com, or contact President Lucas Scheer at (212) 430-3782 or at
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Contact: Lew Koflowitz
LS Global Advisory Group, Inc.
(914) 924-5311
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Investor Perception Studies - Investor perception studies provide important information about how institutional investors currently view a Company, its Management and financial condition, its place within its industry and its future outlook. The studies have strong implications concerning the investment community’s interest and intentions to buy, hold or sell the company’s shares. Both perceived strengths and weaknesses are covered in the studies. Where there is a perception of weakness or underperformance, the studies provide an early warning system to enable the company’s officers, IROs and IR agency representatives to discuss the issues with the investors and provide suitable counter-arguments. In an era of significant investor activism, the perception study helps IROs to keep their boards informed of current investor sentiment and concerns, enabling them to communicate with activists and work with them on their concerns.