Name: Marc Ter Mors

Company: SBG Securities, Standard Bank

Qualifications and/or experience: Head of Equity Research at SBG Securities/Standard Bank since 2011. Before that Co-Head of Equities at Credit Suisse Standard Securities and also analysed several sectors on the JSE over the past 25 years for both regional and global banks. My sector coverage included TMT, Industrials, Construction and Basic Materials. Prior to my career in the broking industry, I was a management consultant at strategy consulting practices in Europe and South Africa.

Q: What do you believe the role of IROs will be in a landscape of diminishing investment research?

A: I believe that there is opportunity for the role of IROs to evolve to ensure the efficiency of local capital markets, by filling in the emerging gaps due to diminishing traditional stock coverage by brokers. These gaps relate to access to investor communities, corporate access, reduction in the quality of consensus forecasts, and the communication of corporate clients’ investment cases. Market/investor feedback loops on corporate strategy, its execution and the buy-side’s perceived investment case for companies are also weakening. Strong collaboration opportunities with the broking community exist on corporate commissioned research.

The breadth and depth of traditional investment research is diminishing as a reaction to changing commercial realities, constraining regulations, reducing listings on the JSE, and decline in the relevance of South African equities in global investment indices. This is not only impacting the coverage of Small- and Mid-capitalisation companies, but also reduces the quality of sell-side consensus on earnings and dividend forecasts because there are fewer analysts contributing to consensus forecasts. The market participants, either employing active or quants/passive mandates, use consensus forecasts to assess expected growth and valuation attraction, while investors often compare their view on corporate earnings progression with sell-side consensus. A reduction in the quality of forecasts raises uncertainty about the earnings outlook, resulting in a rising cost of capital over time for South African assets. This in turn will destroy value potential for investors, the public, and the fiscus.

To compensate for these trends SBG Securities has been leading the introduction of corporate commissioned research (CCR) whereby corporates pay an annual fee for sponsored coverage. Over the past few years, this new research service has grown to represent about 20% of our coverage. It ensures that the company’s investment case is distributed across capital markets and discussed with the buy side.  Expectations contribute to consensus numbers, while financial forecast models are shared with interested stakeholders. So-called corporate access – connecting management to institutional, wealth and retail investors – is a critical component of CCR.

Q: Is there an overlap between IRO’s role and that of traditional sell-side/buy-side research?

A: The starting point is that traditional sell-side research is independent from the potential influence of the corporate, as well as the bank/broker publishing the research. It is the view of the individual analyst that is tested through an internal research quality control process and a compliance review. Since the IRO’s role is an extension of the corporate organisation, these areas are complementary, rather than overlapping and true collaboration opportunities are therefore limited, in my view. Both the IRO role and traditional analyst role have unique competencies that could work together in ad hoc situations such as the provision of investor feedback loops, or organising investor access events (such as non-deal roadshows and conferencing), as well as the organisation of company visits and site tours.

A more comprehensive alignment between the IRO’s role and sell-side is possible with a coverage approach using the corporate commissioned research model, as some of the common objectives include the maximisation of investor distribution, optimising investor access to management, the creation of content for investor relations websites, or even the readership and investor engagement stats with the published content.

Q: What impact has anonymous online information platforms and anonymous equity research had on traditional investment research?

A: Online media and data platforms enhance the instantaneous distribution of information and the initial commentary on this information. It may be one of the reasons that brokers’ telephonic contact intensity with investors has reduced over time with more meaningful engagements such as analyst roadshows, the discussion of model forecasts, and discussions on key news flow remaining unchanged. More of the broker’s service has therefore moved to an ‘on-demand’ pull from investors from the historical approach with substantial reliance on marketing push. Only our tier one clients still receive the full suite of a comprehensive broker research services. We believe it is no coincidence that a substantial number of these clients seem to outperform their respective benchmark indices.

Q: Will AI-based research tools such as machine learning and algorithmic predictions support investors in gaining insights into investing in companies?

A: I think there are broadly four categories of application for AI/ML in the investment space: 1) improving efficiency of data collection and interpretation; 2) the generation of differentiated investment insights using unstructured as well as structured data sets; 3) tracing of momentum and sentiment indicators as well as trade predictability; and 4) automation of augmented investment reports based on client profiles.

The value of these approaches is likely dependent on the type of mandate and investment time horizon of our investor and trading clients. We do see more of our clients blending such quantitative approaches with fundamental views, while quant dedicated investors are often interested in consensus changes and access to unique data sets.  In our experience as a broker servicing multiple client mandates, we have found most value in the second bucket via experimenting with data mining and web craping to generate unique insights.

We are cautious of using AI language learning applications for our primary institutional product as it would reduce its authenticity and risk a direction of travel towards consensus outcomes and herd thinking, which is likely already priced in by the market.

Q: Has there been a shift to remote work and if so, has that impacted your relationship with the IR teams, investors and the market generally? And other colleagues at your firm? Or is it back to business as usual post-pandemic?

A: We encourage our research analysts to work from our four hubs as much as possible as there are substantial synergy benefits within our research teams, particularly to collaborate on thematic reports and advance the development of junior analysts. However, we also recognise that certain tasks can sometimes be performed from home without losing precious time on travel. Also, VC and other online communication channels have improved to such an extent that communication with colleagues and clients can be instantaneous when needed.

Q: How do you maintain a reasonable level of interaction and collaboration with the IRO teams and how does this interplay with your relationship with management?

A: I think that the relationship really depends on the individuals involved and if there is an ‘in-house’ investor relations function or a direct line to management, mainly the CFO. We broadly see two types of IRO functions with respect to analyst engagement; the one that remains confined to corporate access, gate keeping and processing analyst questions, or those IRO professionals that are valuable discussion partners on corporate strategy, the competitive environment and growth conditions.  In addition to our analysts tapping into knowledge such as investor relations, or the facilitation of access to management, I am aware that our analysts regularly agree approaches to investor access, conferencing and market feedback loops.

Q: What steps have you taken to ensure your research is still providing value to clients?

As mentioned above, we introduced corporate commissioned research, which offers broader investor distribution and access to such coverage across institutional, wealth and retail investors. Also, many passive and quant mandates often require the availability of a number of contributors to consensus forecasts on global data platforms. With the increase in passive flows it is important for IROs and company management to ensure that quality consensus forecasts are available, otherwise the instrument may be deemed uninvestable by the systematic algorithms that trigger decisions about portfolio investment or exclusion.