THERE ARE two things that the management of smaller AIM companies frequently bemoan: lack of liquidity and their share price not reflecting fair value.
If you plough through an AIM admission document you’ll find buried deep inside a warning that “AIM stocks tend to experience lower levels of liquidity than larger companies and carry a higher than normal financial risk”.
But as a small cap fund manager recently told me: “I’m here to provide companies with the capital to grow their business; retail investors are there to provide liquidity and drive the share price.”
In that case you’d expect listed companies to put in as much effort communicating with smaller investors, as they do courting the gate keepers to capital funding, the institutional investors. In reality, access to hard cash takes priority and PLC directors are understandably preoccupied with keeping these investors onside, especially given the sizeable positions they take.
So it’s no surprise to see that professional investors end up with many advantages over the average Joe Bloggs. They have access to equity research and the forecasts that form ‘market expectations’, but most importantly they have unfettered access to company management. Whereas the people who provide liquidity and drive the share price can only ask the directors questions once a year at the AGM.
The challenge facing PLCs is to communicate effectively with all investors, big and small; and for private investors to determine if they are investing on a level playing field. So what is best practice?
For AIM companies there are clear rules about websites but there are a few notable things that aren’t prescribed. The most simple is an email address or telephone number for investor enquiries. This might seem obvious, but smaller companies don’t tend to have a dedicated IR function and the chief executive can’t personally respond to every enquiry - they have a business to run after all.
Good IR practice ensures that all feedback is answered, although not all questions can be addressed due to the danger of selectively disclosing price sensitive information. The ability for investors to sign-up online to receive company news is also helpful. Many companies do not include a copy of their city presentations on their website, sometimes justifying this internally by saying that they are commercially sensitive. If something is being provided to a select City audience it should be available for all investors.
Good companies provide a video or audio recording of these presentations. The best companies provide the opportunity for private investors to hear the presentations themselves, the same presentation delivered that day to the likes of Blackrock or Legal & General.
Access to forecasts is a harder one. These are geared towards FCA qualified investors and often are only available to institutional clients of the investment banks. Some PLCs employ paid-for independent research which can be more widely distributed but private investors are pretty much in the dark on what market expectations actually are.
In an ideal world all companies would be required to disclose what the consensus expectations are, but for now investors are reliant on companies realising that phrases such as ‘below / above / in-line with market expectations’ are meaningless to the majority of investors.
We all know that smaller companies don’t command the column inches of the FTSE 100 behemoths and would be delighted by a positive write up or tip in this paper. But companies must remember that if interest from readers drives share prices towards perceived fair value they need to have a coherent plan to engage with them regularly on an ongoing basis. If a company isn’t doing this, then ask them why – and hopefully you won’t have to wait until the AGM to do so.
Not many City advisers can claim to have been a Vatican DJ and the first and (probably) last person to play Jimi Hendrix on Vatican Radio.
Mr McManus began his career as an English voice broadcaster for Vatican Radio in Rome before joining Binns & Co.
In 2009 he founded Walbrook PR, which provides financial PR and investor relations advice to smaller growing companies. Walbrook advises nearly 60 companies valued from £5m up to £250m including Yorkshire based firms Animalcare, Avacta, Getech, Filtronic, Mobile Tornado, OptiBiotix and Renew Holdings.