For example, given the way in which the funds my team manages at MFC Global are constructed, we consider it significant if we beat the stock market by 20 basis points or so on a particular day. In contrast, a 20-basis point swing for my small-cap counterpart is considered typical. But get a load of this: there was a day in July when we beat the stock market by well over 100 basis points – most likely my best day ever as a portfolio manager – and then, in the very same week, underperformed by well over 100 basis points on another day. Can you imagine having your best day ever and your worse day ever in the same week? The word volatile just doesn’t seem to capture the experience.

I’ve been working in this business for almost 30 years now. On many occasions I have observed situations that reaffirm my long-held view: institutional investing should, like jumbo shrimp, be considered an oxymoron. Determining value, reading market fluctuations and acknowledging the conundrums of perception are just a few themes that come to mind.

One obvious example is phone calls from institutional salespeople who work for brokerage firms. These are the people who call every day to share the pearls of wisdom their associates have developed about stocks, bonds, interest rates, earnings forecasts, commodity price forecasts – you get the picture. What is most interesting is that there is a distinct relationship between the direction of the stock market and the volume of calls from these people. As the market rises, so does the number of calls. As the market falls, the call volume shrinks. Shouldn’t it be the other way around?

Year-to-date, the S&P/TSX Composite Index has declined at an almost 11.0% annualized rate, based on the results for the quarter ended March 31, 2008. In addition, due to the uncertainty created by sub-prime mortgage and non-bank asset-backed commercial paper exposure and write-downs, investors are not in a happy mood – and this is certainly unsurprising. Canada’s manufacturing sector is most likely in a recession. The paper and forest products industry? It’s in a multi-year depression! The press has absolutely nothing positive to report and CNN is giving us a constant barrage of disconcerting facts and figures.

As this article goes to print, it is safe to say that so far 2008 has provided investors with more volatility, pain and anguish than all of 2007. (And come to think of it, 2007 was a heck of a lot tougher to handle than 2006, wasn’t it?) The issue facing investors is how much more of this (lousy stock market performance) must we endure and when will it be over.

Alas and alack, I cannot help you there but I am confident that I can assist with one aspect: your upcoming annual proxy circular. When I was hired into this industry over 25 years ago, it was safe to say that we didn’t spend an enormous amount of time poring over these documents. Back then, when you had seen one annual proxy circular, you had seen them all: appoint auditors; approve the slate of directors; and fix management remuneration. In addition, individual shareholder proposals that did make the circular were incredibly rare and institutional shareholders didn’t pay much attention to them because the proposals weren’t taken very seriously. On top of that, it was very rare for a client to quiz us on how we voted on any issue, let alone an extraordinary one.

We’ve all witnessed that annual reports have been getting heavier over the past few years – to the point that some observers expect that by next year-end, only analysts and significant investors will likely be printing full annual reports from websites. In fact, the costs of shipping these large, heavy versions of the annual report are making companies question whether a blanket mailing is the best way to distribute this information. Why the additional increase in girth of annual reports?

The most recent cause of the increasing density is new financial instruments disclosure requirements in CICA 3862, the standard that became effective for fiscal periods beginning on or after October 1, 2007. It is based on International Financial Reporting Standard 7 (IFRS 7), which went into effect at the same time. Companies can adopt the standard early, but many are waiting until it becomes mandatory in the first quarter of 2008 for calendar-year public companies.

Canadian public companies were given a year to transition to the new standard, and many took advantage of the ability to use CICA 3861 for their 2007 year-end, as this disclosure standard was much closer to the existing requirements for financial instruments. The additional disclosures required by the new standard and IFRS 7 were developed in response to risk management concepts and approaches that have evolved in recent years, and new techniques used for measuring and managing exposures to risks arising from financial instruments.

Portfolio managers know, all too well, that we live in a relative world; in many circumstances, it’s not how well you perform in absolute terms, but in relative ones, that count. If we deliver decent absolute returns for our clients year in and year out, but underperform most competitors, our jobs are at risk. (And heaven help us if the results are poor or even terrible in both absolute and relative terms.)

We also know that clients can occasionally have incredibly short memories. It’s the ‘What have you done for me lately’ syndrome. That is, from time to time, clients forget good past results and focus (in many cases, exclusively) on poor or relatively poor current results. And just in case our clients do not take the time to make sure we are delivering good absolute and relative returns, pension consultants and fund measurement services will graciously inform them of our performance.

As many of you know by now I’m a Quant, which is short for Quantitative Analyst. I employ statistical screening techniques to select stocks from which a portfolio is ultimately constructed and managed. Consequently I spend most of my time staring at numbers on my computer terminal or running optimization programs, which is equally rewarding. Clearly, managing money this way isn’t everyone’s cup of tea. The mere thought of statistics can turn many a stomach but it suits my temperament very well and our results have been very good.

Investor relations professionals from all sectors should be communicating their companys’ climate change efforts to investors and analysts, CSR experts say. “The more clearly you can communicate how your company is preparing for a carbon-constrained world, the better,” says Toby Heaps, Editor of Corporate Knights. “Most competitive companies now recognize that responding to climate change is part of identifying risks and opportunities,” adds Wesley Gee, CSR Advisor and Member Development Manager for Canadian Business for Social Responsibility (CBSR).

Companies in high-emitting sectors like oil and gas, utilities and automotive industries have long been aware of investors’ growing interest in climate change. In recent years, companies like Nexen, Petro-Canada and Imperial Oil have received shareholder proposals requesting information on their greenhouse gas emissions (GHG). This year U.S. shareholders filed more than 40 climate-related proposals compared to 27 in 2006, with the majority targeting high-emitting industries, according to PROXY Governance.

In the last CIRI Newsline issue, we discussed the benefits and consequences of being an IRO for a company with predictable earnings. But we only just scratched the surface. In this issue, we’ll discuss some more ‘delicate’ ramifications of being a ‘predictable-earnings IRO’.

Regular readers of this article know that I am a fan of companies with predictable earnings. We all have a general idea as to what that means – companies that are blessed with this characteristic tend to generate quarterly results that fall in line with expectations, time and time again – but, specifically and from a statistical perspective, predictable earnings mean that the standard deviation of the historical earnings are smaller (and here one can also substitute ‘better’) than others. And what this means is that you and I have a better chance of ‘predicting’ what the next quarters’ earnings are going to be – by constructing an elaborate earnings model and spreadsheet, or even by laying a ruler along a graph of the pattern of previous earnings.

I’m not the most technologically proficient portfolio manager out there (but thank goodness my associate is, being fresh out of university). Whenever a new TLA is announced (and for the uninitiated, a TLA is a Three-Letter-Acronym), my head automatically starts spinning. I immediately conclude that, whatever it is, it has something to do with technology and, try as I might, I will never be able to totally comprehend what it does, or why it matters.

The 'Halloween massacre' has come and gone, but the discussion regarding the taxation of income trusts continues. Why is this happening? Will anything be accomplished? And, more importantly, do unitholders care?

The pace of governance regulation slowed down considerably in 2006. In light of the frenetic pace of change in the prior two years, this was welcome news for many issuers. Among the most significant developments was the decision of the Canadian Securities Administrators in March 2006 not to adopt a Canadian version of the much criticized SOX 404. The widely held view that the benefits derived from SOX 404 have not been commensurate with costs of compliance contributed to the decision of the CSA to proceed with Proposed Multilateral Instrument 52-111 in March 2006. Some form of reporting on internal controls is expected to be introduced in the future and, in the meantime, the requirement that the CEO/CFO certificate speak to the design of the internal controls remains in place. The CSA Staff Notice 52-316 addresses certain questions on this provision.

Base metal stocks are rocking (pardon the pun) but it wasn’t always so. In the 80s and 90s, base metal stocks were generally poor investments because the underlying commodities didn’t do anything. However, during that time frame, Noranda was one of the best performing base metals companies, if not the best. It was 50% owned by Brascan Financial and paid the parent company (as well as the rest of the shareholders) a massive quarterly dividend, far in excess of its competitors’ payouts (or those of any rational resource company, for that matter). As a result, Noranda did not have the necessary resources to finance grassroots exploration and development and, unlike its peers, did not undertake the capital expenditure programs that provided poor returns. Consequently it didn’t fritter away precious financial resources. Ironically, Noranda was a great performer because its (financial) hands were tied. In other words, it was the best stock in a very bad sector.

Weaknesses in the Design of Internal Control over Financial Reporting Should be Disclosed CEOs and CFOs are required to certify the design of internal control over financial reporting (ICFR) for financial years ending on or after June 30, 2006. These new certification requirements are in addition to the company’s requirement to disclose in its MD&A its conclusion as to the effectiveness of its disclosure controls and procedures (DC&P). In September, the CSA issued a notice communicating staff’s views regarding the ability of the certifying officers of a reporting issuer to certify the design of the issuer’s ICFR if the certifying officers are aware of a weakness in the design of the issuer’s ICFR that has not been remediated.

The notice indicated that there are circumstances in which the certifying officers can conclude that they are able to certify on the design of the issuer’s ICFR as required even though they have identified a weakness in the design. In the CSA’s view, the certifying officers can certify the design of ICFR provided the issuer’s disclosure in the annual MD&A about the identified weakness presents an accurate and complete picture of the condition of the design of the ICFR. This may be the case for a small company where the CFO prepares all journal entries related to complex matters. In this situation, the CFO may be able to conclude that disclosure controls and procedures are effective because of his or her direct knowledge of the transactions, despite ineffective internal control procedures.

“The Halloween massacre” is how Anne-Marie Buchmuller describes the day Finance Minister Jim Flaherty changed the tax rules governing income trusts. The head of IR for Calgary-based Sound Energy Trust had only been on the job for two weeks when the Minister dropped his tax bombshell and sent the market into a tailspin. The surprise announcement translated into a $20 billion drop in the S&P/TSX composite index on November 1 with sharp losses for the trust sector, which has yet to recover.

“We have had many calls from investors, mostly retail, who are very upset – they lost a lot of money,” reports Buchmuller. “Shock and outrage is the best to describe how our investor base has reacted,” adds David Carey, Senior Vice President, Capital Markets for ARC Energy Trust. “We lost 25% overnight and are still down 20% a month later. A lot of people were caught unaware; our phone lines lit up and email system overflowed with questions from unitholders.”

Mike Reilly looks at the ‘other’ over-the-counter market as the Pink Sheets launches a US version of Aim

There’s a new wrinkle in the fabric of the markets – one that may bring an alternative for US investors hungry to own more international shares and for foreign issuers eager to raise their profile but unwilling to take on the costs of SEC registration, exchange listing requirements and Sox compliance.

The Pink Sheets – or the Pinks, as it is known on Wall Street – dates back almost to the beginning of the 20th century. It has traditionally been seen – and still is by many today – as an outdated paper-based quotes arena for a wide array of shares – and mostly dicey penny stocks at that.

But under the stewardship of a savvy New York area native named R Cromwell Coulson, the Pink Sheets has become a robust contender for the attention of many companies, including western Europeans who have recently shied away from the US.

With a snappy internet venue for its now all-electronic quotations, the Pink Sheets has steadily added features to make the market attractive to all constituents – issuers, market-makers and, most importantly, investors. Its quotes are distributed by all the major vendors, from Reuters to Bloomberg. Now it plans an elite quotation that will require high levels of disclosure, though not as high or as extensive and expensive as those required by SEC registration.

Here comes OTCQX
The Pink Sheets’ new OTCQX is touted as being similar to London’s Alternative Investment Market (Aim) in its structure, and Coulson has created a chart on the new web site (www.otcqx.com) showing the parallels. The chart also shows how the new service will stand out from both the Pink Sheets and the OTC Bulletin Board, on which many over-the-counter stocks are posted under the aegis of NASD.

The bottom line for non-US companies is that by backing a US quote of their stock listed, say, in London or Frankfurt, a ready market is presented for US investors. Such quote generation is done by market-makers, typically broker-dealers, who simply begin to make a market in a given stock and then post their bid and ask prices. This may come from their own belief that interest is out there, or it could be generated by institutions that let the dealers know they want to see prices.

Companies like Nestlé, Roche and Heineken already trade on the Pink Sheets and enjoy US visibility without the high costs of Sox regulations or registration and listing fees. ‘Look at consumer brands with US employees, with big US customer bases,’ says Coulson. ‘If you are Volkswagen, you want people who buy your cars to be able to buy the shares easily. It increases the number of repeat customers.’

The overall move in European markets toward greater transparency and best practice in disclosure plays directly into the new OTCQX proposition. By offering a venue that guarantees only companies with strong disclosure habits and regular financial reporting that meets its listing standards, the OTCQX hopes to attract more investors and well-regarded issuers, regardless of size.

More varied IR
The new service will create three tiers of companies, with the highest level of well-qualified firms having to hit several marks in addition to regular financial reporting and good disclosure. Added criteria include management certifications, quarterly reporting and the appointment of a ‘designated advisor’ – a kind of monitor to ensure compliance.

Since there is no exchange listing and the requirements of SEC filings are limited to matching those of companies’ home countries, there can often be a certain relaxation of IR among Pink Sheets stocks. There is no retail component to IR for Roche, for example, since its shares are mostly owned by institutions and it does not seek retail investors in the US. Then there are the special situations, which abound on the Pinks. Owens Corning, driven to bankruptcy by asbestos lawsuits, moved over to the Pink Sheets while working itself out of its problems.

Sox pushed some US companies onto the Pinks along with foreign ones. Moving off the American Exchange shortly after Sox came over the horizon was a strategic choice for the Ziegler Companies, a Midwestern financial services firm with billions of dollars in business and billions more under management for clients.

‘I immediately perceived Sox as highly problematic from an expense and management point of view,’ says Ziegler CEO John Mulherin. ‘Requirements for new board committees, Section 404 compliance, extra auditing – all these combined to create a task we could not afford. We decided to de-list and deregister.’

But unlike Owens Corning and others who almost seem to be hiding on the Pinks, Ziegler cares a lot about its shareholders and their perception. ‘We made a lot of calls, wrote letters and had conversations with shareholders, clients, employees and other constituents. We spent a great deal of time explaining to people how to use the Pink Sheets,’ Mulherin recalls. ‘It was important we be very clear about our views on corporate governance and transparency.’

Did the move to the Pinks pay off? ‘The effort was endorsed by shareholders, who saw that we were saving capital and guarding profits. The stock price appreciated by 10 percent,’ the Ziegler CEO states.

Foreign companies unwilling to take the expensive and rules-strewn path of a full exchange listing may be encouraged by the new ‘premium’ OTCQX. After all, Federal Reserve figures show non-US stocks represented just shy of 16 percent of US portfolios at the end of 2005 – a record level, but one that leaves a lot of room for growth.

by Mike Reilly
Thanks to IR Magazine for allowing us to bring this article to you.

Hedge funds are famous for being illusive and cunning asset managers that lurk in the shadows, digging for insight into stocks beyond what’s been disclosed. They’re also gaining a reputation as activists that buy up stakes in companies and publicly press for management to make changes. It’s imperative, however, that IROs not let these stereotypes taint their perceptions of the industry. Many hedge funds are long-term, loyal holders that can serve as sources of market intelligence for investor relations.

In September, the Canadian Securities Administrators (CSA) issued a report on findings and recommendations arising from its second targeted continuous disclosure review of business income trust issuers. The report posted some rather dim results, given that of the 45 income trusts issuers reviewed only seven had no identified deficiencies in their continuous disclosure. The CSA once again identified the presentation of non-GAAP measures as a significant issue. The report followed on the heels of the publication of a revised staff notice on Non-GAAP Financial Measures. The revised staff notice narrows the definition of what is acceptable disclosure of non-GAAP financial measures. This article will explore the impact of these revisions so that IROs can better evaluate the use of non-GAAP measures in their MD&As.

There has been much progress made in the corporate governance arena, except in one aspect: executive compensation disclosure. There is much work that remains to be done until investors can describe executive compensation programs with only a crayon (to borrow and modify Peter Lynch’s description of what stocks to buy – only buy those you can describe with a crayon).

NEW YORK -- UK companies continue to lead the way in terms of best practices in corporate governance and Canadian firms are a close second, according to recent ratings from New York-based Governance Metrics International (GMI).

Twice a year GMI looks at the corporate governance practices of 3,200 companies worldwide and rates them on scale from one to ten. As was seen in March, which is the last time GMI did this study, UK companies hold the top position with an overall governance average of 7.33. Similarly, Canadian firms continue to rank second with an average score of 7.31 and US companies come in third with a score of 7.

Notably, GMI's rankings suggest a link between good practices in corporate governance and shareholder returns. It finds that top-rated companies outperformed the S&P500 index by 15.19 percent in terms of total shareholder returns over a five-year period ending September 1, 2005.

The agency also compares the performance of US companies that received top grades (nine or above) to poor performing companies (three and below) in four out of the six studies they have conducted over the last three years. GMI discovers that firms that are consistent low scorers had an average shareholder return of 8.7 percent whereas well-governed companies achieved an average return of 15.9 percent over three years. During the same time period, the S&P500 had an average return of 11.9 percent.

Gavin Anderson, GMI's CEO, explains that companies with poor governance scores were more likely to have restated earnings and been subject to accounting investigations by regulators. 'These firms reported more related-party transactions involving senior officers and directors,' he says. 'They were more likely to have multiple classes of voting stock and their boards had fewer independent directors than companies with consistently good ratings.'

As part of this research, GMI also looks at the governance practices of controlled companies, which are identified as firms where a single entity holds at least 50 percent of the voting power. For this section, GMI analyzes 390 controlled firms including 152 from North America, 156 European companies and 82 headquartered in the Asia-Pacific region. It finds that, as a group, controlled companies achieve an average rating of five, significantly lower then the average score of widely held firms (6.5).

GMI also shows that controlled companies with the poorest results are mostly located in Asia and Europe. Out of the controlled firms achieving a rating of four or lower, 65.4 percent were from Europe, 25.6 percent from Asia Pacific, and 9 percent from North America. The most common governance issue for controlled firms is lack of independent directors on the board.

Some controlled companies strive to attain best practices in corporate governance, GMI finds. Examples from its rankings include Talbots (8.5), UnionBanCal (8.5), Genworth Financial (8), Interactive Data (8), Kraft Foods (8) and Telstra (8.5).

IROs should take note of findings linking best governance practices to shareholder returns, says Anderson. 'It is clear that there is some correlation between governance and performance and while corporate governance screening is not number one, and should not be the most important aspect of investment research, it is nonetheless an area that should be looked at as part of the overall research process,' he concludes.

LONDON -- Many of the largest companies in the UK are stifling their key messages in annual reports, according to a recent study by London-based consultancy Merchant Group.

The study shows that 37 percent of FTSE 500 companies neglect to define a clear or measurable strategy in their annual report. Merchant defines a clear strategy as a statement including a quantifiable or measurable factor that allows investors and analysts to measure a company's progress. 'It comes back to the old adage: what do you use the book for?' explains Merchant's Ben Hardy. 'Do you want to communicate with shareholders and investors, or is it just a statutory document?'

NEW YORK -- Just shy of its fifth anniversary, the most restrictive disclosure rule in US history was dealt a blow yesterday when a Manhattan judge dismissed an SEC claim that California-based Siebel Systems violated Reg FD.

There is a lot of confusion among companies about what sort of information they should be providing investors and analysts on climate change. Some companies have never been asked for this data by shareholders so the buy side’s expectations can seem obscure. ‘No-one ever, and I really do mean ever, has asked us about this,’ one IRO from a Eurotop 300 company said recently. ‘Not once. Not one fund manager or analyst has ever brought this up.’

His company is taking climate change and other corporate responsibility issues seriously. It tries hard to communicate what it is doing in this regard to its investors. But it is not convinced that more than a minority is at all interested in knowing about what the firm is doing in this area. So are climate change and other corporate responsibility matters really of relevance to IR? Or are these still marginal issues of interest only to parties with certain agendas and pro-socially responsible investment (SRI) groups?

SYDNEY -- A major shareholder in Australian cotton manufacturer and marketer Namoi Cotton has publicly criticized the company's board for not treating the interests of capital investors the same as those of grower investors.

An unnamed spokesperson for Warakirri Asset Management, a small Melbourne-based investment house, condemned Namoi's board in the Australian Financial Review this week for not doing enough to increase liquidity in the stock and not encouraging investment from institutional shareholders. 'This is the weakest board of any enterprise we've ever invested in,' the spokesperson wrote.

The comments come in the wake of a takeover bid for Namoi from Queensland Cotton at 71 cents a share that was rejected by Namoi's board. Namoi's shares traded between 45 cents and 55 cents prior to the offer.

As a grower-controlled entity, Namoi faces a number of challenges more mainstream listed vehicles don't have. The share structure is designed so only cotton-growing members can vote on company resolutions, with capital investors unable to access these special voting rights.

Although Warakirri has expressed disappointment in Namoi's share structure, it was aware of the arrangement when it bought into the company.

Tim Powell, a director of Cox Inall Communications, says shareholders who buy into agri-business stocks need to understand the unique situation these companies are in. 'These stocks generate good dividend returns and capital growth over time,' says Powell. 'While 'farmer boards' are bound by the Corporations Act, there is an unspoken tug on them from their political base; this makes them unusual boards to deal with.'

Namoi's board comprises a majority of grower directors, who are elected by cotton growers.

LONDON – Recent media reports suggest UK property companies are 'sidelining' IFRS results by emphasizing UK Gaap results. But are companies really undermining the new standard or simply reporting additional information to help the market deal with the transition?

Hammerson, Slough Estates, and Liberty International are some of the property companies resorting to their traditional ways of reporting earnings. While they are disclosing the new numbers as required under IFRS, they are also highlighting key data in UK Gaap. The move is meant to help readers have a better understanding of the new numbers.

Property companies are mainly affected by IFRS standards when accounting for changes in valuations of properties, and the requirement to provide in full for deferred tax on revaluations.

For instance, under the standard 'IAS 40' companies take investment property revaluation movements through their income statement, as opposed to reserves via the statement of recognized gains and losses as currently required under UK Gaap. Also, under IFRS, companies will have to start providing deferred tax on any revaluations of properties, which was previously prohibited in UK accounting.

Steven Brice, head of the IFRS taskforce at European audit firm Mazars, says companies believe that by highlighting information under UK Gaap or other adjusted earnings figures, investors will have an easier time understanding results.

'Investment property revaluations under the old UK rules are perceived as a balance-sheet adjustment while under IFRS this movement is taken through the income statement and therefore impacts reported profits each year. Results of companies with investment property portfolios are certainly going to be a lot more volatile than we have previously seen, since valuations fluctuate according to market conditions,' he says. 'I am not surprised companies are refocusing on old UK rules, because they certainly want to adjust for items that are causing volatility and which are not seen to relate to the operating performance of the company.'

Brice also says it will be interesting to see if companies continue this trend in next year's reports after investors have adapted to the new standards. 'It is a new trend. I would not go as far as to say it is misleading. For me the issue is: is this something they are going to continue to do every year or is it one-off in this transition period?,' he asks.

KUALA LUMPUR -- It's been less than a month since the government released guidelines demanding strong performance and good corporate governance from local firms, but foreign investors are already impatient for results.

A handful of business trusts are showing the rest how IR should be done, writes Neil Stewart

‘Doing IR for income trusts must be the worst job!’ exclaims a Canadian analyst. Business trusts, she says, are a ‘very unsophisticated market,’ and she adds: ‘They just don’t know how to handle us. Many were taken public out of greed, and a lot of them outsource IR to firms that are really just promoters. Honestly, the little ones are just going under or being bought by vulture investors.’

She concedes, however, that large business trusts like BFI Canada and Yellow Pages – and the other 14 business trusts added to the S&P/TSX Composite Index this year – have good IR teams.

But as we wrote in Tax free – and losing trust in the June issue of IR magazine, the trust structure has been adopted by a raft of smaller companies that lack the stable and predictable cash flow necessary to meet the promises of regular income made to unit holders.

‘When we first became a trust, it was a concept meant for a relatively mature, stable business with a dominant position and a recognized name, and we met all those criteria. But of late it’s been a very popular vehicle for all sorts of new issues,’ says Gord Nelson, CFO of movie theater chain Cineplex Galaxy, which took home three trophies at the IR Magazine Canada Awards 2006.

John Vincic, executive VP of BarnesMcInerney’s IR division, confirms that the whole sector is under siege: ‘Out of all the trusts that have cut their distributions, we’ve yet to see a single one make a comeback and restore their distributions to historical levels. Until we see a regular pattern of trusts able to do this, they’re going to continue to be punished severely.’

A lot of business trusts ‘are on a learning curve as to what information people need as opposed to what they’re required to give out,’ with the former outstripping the latter, says Dirk Lever of RBC Capital Markets, Canada’s leading trust analyst. He advises trust IROs to ‘imagine you’re reading your public documents, and ask yourself if you would be able to build a model using that information. If I’m unable to build a model, I’ll just pass right over you and pick someone else to do research on.’

In fact, most of Canada’s 263 trusts ‘are finally getting it,’ Lever says. The main thing for trusts to focus on is cash flow, not earnings. ‘IR people from a corporate background have to make that jump to understand where cash flow is coming from and what the bank covenants are. Some of the disclosure from trusts is better now, but some is just brutal.’

Getting noticed
Business trusts, which have rapidly grown to represent a significant chunk of Canada’s capital markets in the last half-decade, started to get noticed in IR magazine’s Investor Perception Studies in 2004, when Yellow Pages won best IPO for its mid-2003 listing. ‘Better than anything else I’ve seen the last year,’ said one respondent to the survey. The contrast between this and other companies not so suited to the trust model was already emerging: ‘The perfect type of business for an income trust. It dominates its industry,’ said another voter.

Also in 2004, BFI Canada won best investment community meetings by a small-cap company, an achievement it repeated in 2005. This year Aeroplan Income Fund took home the award for best IPO, while Cineplex cleaned up in the under $1 bn market cap range.

Anne MacMicken, BFI Canada’s manager of investor and employee relations, says doing IR for an income trust is no different than common equity IR. ‘We have different performance metrics, true. But the common thing is good and open communications based on the needs of the investment community and on the personalities of management.’

The recent negative focus on business trusts has been exaggerated, MacMicken believes. ‘My biggest challenge is getting people to realize that there are some of us in the business trust sector that are ideal for this structure, with consistent cash flows, a stable industry and predictable capital expenditure,’ she says.

MacMicken has seen an increase in the proportion of institutional investors since BFI was added to the index. In fact, the wave of new investors preceded the expansion of the index by several months. ‘As soon as they knew we were going to be included in the index, we started meeting with them and getting them educated. It definitely affected us – we saw trading volumes increase, for example. But this year, with the official addition to the index, we haven’t had to do any extra IR work.’

The new institutional following that comes with inclusion in the index is raising the standard of IR across the asset class, says Rik Parkhill, president of TSX Markets. ‘The demand on IR at income trusts has always been significant because they had large, fragmented retail investor bases,’ he says. ‘But the inclusion of trusts in the index really raised the comfort level for institutions, and in response, we’re seeing more corporate IR professionals at trusts.’

Retail following
For its part, Cineplex, which is too small to be added to the index, started out with a fairly retail-heavy 50-50 mix and isn’t seeing any change. ‘After all, we have instant recognition from retail investors – people know what Cineplex is,’ Nelson says. Pat Marshall, VP of communications and IR, adds: ‘For anyone following the Warren Buffett theory of investing – buy what you know – it’s easy to know movies and the movie theater business.’

Another contrast with BFI, which has only generalist trust analysts covering it and not a single waste management analyst, is that Cineplex has started to attract specialized media analysts. Nelson says the change has happened over the last 18 months. ‘With a few years of history under their belt, the brokers now tend to have media analysts who understand business trusts but also cover traditional corporations.’

By the same token, Nelson is skeptical about the Canadian Association of Income Funds’ efforts toward standardizing financial disclosure for business trusts, particularly the non-Gaap measure of distributable income. ‘There are a lot of nuances in different businesses, so it would be difficult,’ he says.

It’s companies like Cineplex – and BFI Canada – that provide hope for Canadian investors now that the sheen on business trusts has been tarnished. And not just hope – Cineplex caters to its retail following, as well as Bay Street professionals and media, with an AGM that is ‘the most fun to attend of any out there,’ according to Marshall. The latest meeting, held in May, was at the Paramount Toronto, one of Canada’s most successful theaters. Accompanying the PowerPoint and executive speeches were – naturally – popcorn, soft drinks and candy.

by Neil Stewart

Thanks to IR Magazine for allowing us to bring this article to you.

Adrian Holliday sits down with Neil Wesley of Morley Fund Management

Fund manager and analyst Neil Wesley originally trained as a classical pianist, but this 33-year-old Australian admits he made an early decision to opt for bourgeois comfort rather than ‘probable’ artistic poverty when he headed for university to study economics and finance. Since leaving the Royal Melbourne Institute of Technology in 1995, Wesley has racked up a great deal of investment experience: following a spell with KPMG as an auditor and roles with Portfolio Partners, which is owned by Morley Fund Management, he now works for Morley itself.

His current remit is broad to say the least, covering a range of sectors from luxury goods to banking and finance, and the turmoil in world capital markets – with stocks currently gyrating downwards in every continent – is making for a lively summer. ‘The market was previously looking very ‘toppy’ generally,’ he says. ‘Some stocks, particularly commodities, were looking very expensive, but the market is still looking reasonable value at 12 times P/E.’

So what of IRO contact? What does Wesley like to see from IROs, and what would he like to see less of? Wesley says he’s careful not to waste time on minutiae during face-to-face meetings, especially if management or a CFO is present.

Before this interview Wesley was on the phone with Royal Bank of Scotland, tidying up a question that couldn’t be clarified at a recent meeting. ‘We try and meet at least twice a year, post-full-year and interims,’ he says, ‘but we’re not shy and we’re only a phone call away. We like to see the whites of their eyes and ask questions direct. Sometimes an IRO will stick to their own script, so we’ll want to try and subvert that with our own questions and our own agenda. Also, management often prefers this. They’re so tired, often, of regurgitating the same old set speech.’

With an experienced management team, it can obviously be difficult to wrench open the group presentation to get under the chassis and have a good poke about. But asking open questions is an opportunity to explore and see where things go. ‘It’s often more about voice inflection and body language,’ Wesley says. ‘I remember talking to this finance director about rising input costs like oil and transportation, before he let us know how sanguine he was about his company’s market. This led us to believe their forecasts were probably optimistic. Their costs were too high, so their stock, in terms of earnings, really should have been downgraded.’

Wesley’s too discreet to be specific about particularly difficult IRO and management meetings. ‘Part of our success,’ he says, ‘is establishing a rapport with management. We don’t want to be seen as stabbing them in established forums.’ Nevertheless, IROs who get carried away with an inflated sense of their own significance certainly annoy. ‘They can overstep, particularly when the CEO is in full flight – they add more noise than content. It’s amusing when they don’t even realize the question isn’t aimed at them, but the CEO!’

Hot favorites
So what sectors are now looking particularly appealing? Wesley believes banking is a strong contender, though he feels you have to get past the current trend for bank-bashing to see it. ‘Look at what the Office of Fair Trading is doing,’ he says. ‘Consumer advocacy, talk of more transparency... the industry does have high levels of profitability, so it’s an easy target. We’ve also been seeing bank-bashing in Australia, with their credit card enquiry. But we operate in a neo-liberal environment, and shareholders do own the company.’ In other words, why the big surprise at the fact that banks make money?

The bank-bashing frenzy is also a reminder that corporates now have to cultivate their SRI obligations. ‘What SRI does is help force a level of honesty,’ Wesley says. ‘The investing parameters are still the same – and don’t forget that we’re all bound by ethical considerations anyway. We engage with companies at every level, particularly at AGMs. Our corporate governance team meets regularly with chairmen of companies to discuss salaries, or we invite them in. Generally, people don’t like surprises. It’s better to engage productively in private.’

One company Wesley particularly admires is household products firm Reckitt Benckiser, which not only has a very committed stance on CSR but also delivers real performance. ‘It innovates and invests and understands the power of advertising and promotion, and its management team has an excellent record in delivering too,’ he says.

From value to growth
As for investment styles, Wesley is careful not to straitjacket himself too tightly. Value investing has had a terrific run in recent years, and with the current tumble many value investors will still be glad to hang on to their steady dividends. Still, anyone reading the investment pages over recent months can’t have helped noticing the bugle call for ‘growth’ stocks. Wesley’s work at Morley is, he says, more biased towards ‘growth’, but he hedges a bit when asked to come down on one style or the other. ‘I don’t think it’s that clear where we’re at now,’ he says.

With the interview coming to an end, Wesley is gearing up to dash to a meeting. A last question: how does he feel about the quality of financial news coverage of stocks, given that companies shell out ever-larger amounts of shareholder cash to PR agencies to gain coverage and visibility?

‘The press,’ he responds immediately, ‘don’t pay enough attention to the real underlying rates of change. Maybe, for example, a company improves its earnings by X percent, but then you get dramatic headlines about the absolute number, which often says precious little about the underlying improvement of the company.’ Typical media histrionics – but not on these pages, of course.

by Adrian Holliday

Thanks to IR Magazine for allowing us to bring this article to you.

A new survey finds that neither companies nor fund managers are happy with the state of small-cap IR in the UK. Ben Bland reports.

Depending on the level of interest in your company, the IPO is often the easiest part of acclimatizing to life on the equity capital markets. Investment banks and corporate brokers take the lead and do much of the hard work, eager to justify their substantial fees. As a small cap, it is once you’re listed that it becomes much more difficult to maintain investor interest and keep lines of communication open.

Undercovered
A new report by Thomson Extel reveals that most UK small caps, defined as those businesses with a market cap of less than £1 bn ($1.88 bn), struggle to get a reasonable amount of analyst coverage. Twenty-six percent of those surveyed have only one analyst covering their company other than their house broker; 38 percent have three to five analysts, and more encouragingly, 31 percent say that they have more than five analysts.

As the finance director at a FTSE small cap, Hampson Industries, Howard Kimberley knows all about the difficulties of generating enough coverage. ‘The lack of breadth of analyst coverage is a perennial problem for smaller capitalized companies, particularly those in ‘old economy’ businesses,’ he says in the report. ‘Effective analyst cover is key to ensuring that our equity story is properly understood and communicated and hence that the performance drivers of our business are properly framed for balanced and meaningful analysis.’

While he is unhappy about the amount of coverage his company receives, Kimberley, unlike many of his large-cap counterparts, has no qualms about the quality of sell-side research. ‘While we have not been very satisfied with the breadth of coverage through the recent downturn in the aerospace industry, we have no complaints about the quality of research coverage of the sector,’ he adds.

The director of market services and head of Aim at the London Stock Exchange (LSE), Martin Graham, accepts that a lack of analyst coverage is a significant problem for many small caps. ‘The availability of analyst coverage is a challenge for all publicly listed SMEs,’ he comments in the study. But, with his marketing hat firmly on, he insists that companies get better coverage in London than they would elsewhere. ‘Anecdotal evidence, however, suggests that the research coverage for Aim companies exceeds that for companies listed on similar exchanges elsewhere in the world,’ he says.

Paid research suspicions
Every small cap wants more coverage, but how can they go about attaining it? Company-sponsored research has become more common in recent years. The report finds that 21 percent of respondents do pay for sponsored research to be written about them.

Some providers of sponsored research go to considerable lengths to show that they provide unbiased coverage of their clients. Despite these protestations, however, there are inevitably doubts about the veracity of research paid for by issuers.

Of the 214 small-cap fund managers surveyed, none think that company sponsored research is ‘very useful’ and 36 percent say that it is ‘not useful’, begging the question of whether it is worth companies shelling out for such research. In contrast, buy-side firms have much more time for independent research they have commissioned themselves, with 24 percent of respondents saying they find it ‘very useful.’

Better IR needed
It’s all too easy for small companies to feel they’re getting a raw deal from the analyst community, but are they really doing enough themselves to boost their profile with investors? Jimmy Burns, co-manager of Berenberg Bank’s small and mid-cap fund, thinks not.

‘The root of the problem in the UK lies in the underdeveloped role of investor relations,’ he says in the report. ‘While the UK has arguably the most developed small-cap industry in the world, the small-cap fund manager still encounters barriers to information which, perhaps surprisingly, are less prevalent in continental Europe.’

On the continent, Burns explains, companies send out comprehensive information on a regular, often quarterly, basis and ensure that their investor presentations are accessible to those who do not already know the company. It’s an altogether different picture in the UK. ‘By contrast, I find that [UK] companies are often hard to access and information flows are poor,’ he continues. ‘Companies typically depend on their house broker to organize meetings and to control access to management, resulting in a disproportionate amount of time being spent with a small number of existing shareholders.’

But Burns believes there is hope, and that UK small caps have a good opening to prosper on the back of Aim’s current buoyancy. ‘The UK has a fantastic opportunity to build on its reputation as a premier location for trading in small caps,’ he concludes. ‘The routes to company access have become stale and need revisiting, and objective secondary research needs to be encouraged to maximize this potential.’

Thanks to IR Magazine for allowing us to bring this article to you.

The recent Michael Jackson trial underlined the dangers of having valuation tied to a name and face. Despite the not guilty verdict, the value of Jackson’s brand has been sullied by accusations of child molestation and his admitted obsession with all things fantastical and child-like. And all those who profited from his pop icon empire will feel the loss.

Which brings us to IR. One of the strongest arguments for the function being strategic is that it gives analysts and investors someone to talk to when the CEO is unavailable, indisposed or out to lunch, both figuratively and literally. What if your CEO admitted to a favorite pastime of spending hours up in trees? Investors might not feel as comfortable with his or her leadership strategy or even start hoping that someone else was steering the ship.

As a result of Bill 198, Investor Relations professionals need to ensure their company’s existing disclosure policies, controls and procedures comply with current regulations to adequately safeguard the company from Civil Liability.

Having good corporate disclosure practices in place early on is something Eleanor Fritz, Director, Compliance & Disclosure at Toronto Stock Exchange (TSX), supports. “TSX has been working closely with relevant bodies to create awareness for good corporate disclosure practices” says Fritz. “Adhering to TSX’s Timely Disclosure Policy goes a long way to ensuring credibility from the investment community. And it’s certainly wise for pre-IPO companies to execute their due diligence and put appropriate procedures in place at the earliest possible stage”.

John Hughes, Manager of Corporate Finance Branch, Ontario Securities Commission (OSC), recently stated, “Companies need to look at their particular situation in collaboration with professional and legal advisors to determine what standards, procedures and instruments will best manage the company’s exposure to Civil Liability. Specifically, they need to ask questions such as ‘what is a good way to promote good corporate culture and good internal processes?’”

Appoint Authorized Spokespeople
A starting point is to create written policy which designates authorized spokespersons to respond to enquiries from investors, stakeholders or business media. The key for companies is to assess in practical terms what is required under current securities legislation and public expectation when going public. How will the company respond to issues in a timely, factual and accurate manner? Who will answer the calls and be authorized to speak on behalf of the company?

Audit and Disclosure Committees
Securities legislation now requires newly listed companies to have an Audit Committee in place at the outset. Another equally important internal authority for companies to contemplate is the creation of a Disclosure Committee.

Public issuers today commonly use a multi-disciplinary approach by having representatives from various areas of the company sit on their Disclosure Committees. Areas such as IR, Finance and Corporate Governance are typically represented. This approach ensures that all competing views present within a company are equally represented, resulting in a more balanced view whenever there is a need for disclosure of material information.

Core Disclosure Documents
Good quality disclosure builds street credibility. Therefore, giving careful consideration to core disclosure documents like quarterly filings is another area where companies can benefit from some forward planning. Ensure that documents are of good quality, in accordance with Generally Accepted Accounting Practices (GAAP), and include a well balanced Management Discussion and Analysis (MD&A). Newly-listed companies should avoid situations where incomplete quarterly filings in the first few quarters after going public are filed on SEDAR.

Communications Strategy
In addition to implementing a credible disclosure practice for your company, Tom Enright, President and CEO of CNW Group, believes that the execution of a multi-platform communications strategy is crucial to the success of a company. “Companies need to view communications as a significant contributor to the bottom line and a tool to minimize exposure to civil liability,” says Enright. “Producing results is not enough; a company’s goal should be to use effective communications to deliver a company’s message to stakeholders and shareholders.”

It is important for a company to communicate in good times and bad, and to begin building relationships with stakeholders and business media before they are needed. Ensuring that an authorized spokesperson is always reachable by stakeholders and the media will go a long way in building up trust and credibility for a company.

Resources
Besides seeking assistance from professional and legal advisors, there are resources available to assist companies in putting good disclosure practices in place:

• TSX Group’s website www.tsx.com, one of Canada’s busiest financial websites, contains several useful resources for TSX issuers, including the TSX Timely Disclosure Policy and Electronic Communications Disclosure Guidelines.
• Canadian Securities Administrators’ National Policy 51-201: Disclosure Standards is a good reference document on corporate disclosure. The policy document can be accessed on the OSC website at www.osc.gov.on.ca.
• An online presentation by John Hughes, Manager of Corporate Finance Branch, OSC, entitled “Leveraging Continuous Disclosure and Civil Liability” is available for download at http://www.newswire.ca/en/extras/custom/bmail_030/.
• The Research and Guidance section of the Canadian Institute of Chartered Accountants website, www.cica.ca, is another useful resource. The Performance Reporting Resource Centre section contains publications and guidance on Management Discussion & Analysis. The Risk Management and Governance section has information on disclosure controls and procedures.
• The Canadian Investor Relations Institute (CIRI) has several useful publications for IR professionals. “Standards and Guidance for Disclosure and Model Disclosure Policy” helps public companies avoid selective disclosure and includes a disclosure policy template that companies can use to draft their own disclosure policies. More information can be found on the CIRI website, www.ciri.org.
• CNW Group offers a comprehensive range of disclosure communication solutions within CNX Marketlink. CNX Marketlink is a TSX-endorsed and CNW-delivered suite of services that includes unsurpassed reach into Canadian, US and International news and financial communities via newswire, webcast, podcast, regulatory filing, transcription, translation, conference calls, IR websites and more. For more information visit www.cnxmarketlink.com.

Melody Firth is a Corporate Communications Manager at CNW Group, Canada’s leading newswire since 1960 and most relied upon source of full-text, time-critical news and information for the media and financial communities. The views, opinions and advice provided in this article reflect those of the author and do not necessarily represent the views or opinions or advice of TSX Group Inc. or its affiliates.

This article originally appeared in TSXtra Newsletter, September 2006, Vo. 5, Issue 3. We thank TSXtra for allowing us to bring this article to you.

Early in the year, Section 404 compliance hung like a weighty yoke around the necks of US listed companies. It sucked up resources, diverted the finance department’s attention and, in some cases, put pressure on earnings. It consumed far more dollars than anyone ever imagined – an average of $4.36 mn per company, according to a survey by Financial Executives International (FEI), a leading professional organization for CFOs and senior financial executives.

On March 16 thousands of companies breathed a sigh of relief. Having completed their first round of internal control certifications on time, their yoke had fallen. However, some companies still bear the awesome weight of impending Sarbanes-Oxley Section 404 compliance. Among them are several hundred companies that requested filing extensions, non-calendar year companies, and those dubiously ‘lucky’ small caps and foreign issuers that won a reprieve from the SEC and don’t have to file until 2006.

Mixed results
Not only does Section 404 require companies to identify, test and certify their internal controls over financial reporting, it also requires their public accounting firms to evaluate and attest to the effectiveness of these internal controls. With companies and auditors bound to report material weaknesses that come to light during their intensive 404 reviews, there was much speculation about how the market would react to such news.

For the many IROs like Don Washington, whose company passed the certification, the experience was almost a non-event. ‘Our investors have had very little curiosity about the results of the certification,’ recalls Washington, director of IR and corporate communications at EnPro Industries, a diversified manufacturer of capital goods. ‘The only question we have gotten has been about the cost of the whole effort. We never had any concern expressed about our ability to meet the requirements.’

Lori Barker, director of IR at SanDisk, a major supplier of flash memory data storage card products, had a similar experience. ‘SanDisk passed 404 and I had very limited questions from Wall Street,’ she reports. Barker says her company spent an ‘enormous’ amount of time and money on the process. ‘For companies that failed, or delayed [their] earnings release due to 404 work, stocks were penalized,’ she adds.

Other companies found their valuation affected after reporting in line with Section 404. Credit Suisse First Boston (CSFB) tracked the stock price performance of 74 companies that announced a material weakness between October 2004 and February 2005.

‘We looked at their stock price performance for the 20 trading days before the announcement and the 20 trading days after the announcement,’ comments David Zion, accounting analyst at CSFB. ‘The day after the announcement was – for this group of companies – the worst-performing day in that entire trading period.’

As many of the companies included in the study were small caps, CSFB compared their relative returns to stocks in the S&P 600 Small Cap Index. ‘If you look at that group of companies, stocks were sort of heading down before,’ Zion points out. ‘With the announcement of the material weakness [stocks in the study] headed down even more the next day, and 20 trading days after did not recover.’

Zion describes what goes through an analyst’s mind when a company says it has trouble with Sox 404 compliance: ‘When a company announces a material weakness in internal controls, the initial thought process is, That’s not a good thing. Analysts wonder, Can it continue to put the same reliance on the numbers in the financial statements?’

Take control
However, Zion warns that the focus should be on the plans a company makes to correct the situation, not on the problems themselves. As he points out, when a company announces a weakness, it usually lays out a remediation plan. ‘You can take that as a positive,’ he stresses. ‘The weakness has been there, but it is getting fixed so, going forward, that’s a positive.’

Barker believes this is where clear communication is absolutely essential. ‘Each circumstance is different, but it is hard for investors to have time to investigate the specifics,’ she notes. ‘IROs owe it to the investor to make sure they clearly articulate the impact of the material deficiency and the fix.’

In evaluating companies’ Sox 404 announcements, investors need to consider the level of risk and uncertainty, according to Zion. ‘Investors should ask themselves a number of questions to try to get a feel for whether or not the company now appears more risky,’ he explains. ‘You need to ask questions like, Has the company had accounting problems in the past? What is the weakness? What line items does it affect? Does it, in fact, affect key performance metrics? Is it company-wide, or is it one item on the balance sheet? Now that it’s been fixed, would you argue that maybe there’s less risk? We would recommend that investors focus on the remediation efforts the company has laid out and how clearly it has laid them out.’

Zion’s approach also involves looking at what a company is saying about the material weakness and thinking about it in terms of how much uncertainty comes along with what it is saying. ‘[The biggest uncertainty is] when a company can’t comply with Section 404 and the auditor disclaims opinion – then the company has an incomplete 10K,’ he points out. ‘[The least uncertainty occurs] when both the company and auditor agree controls are effective and the auditor provides a clean opinion.’

For Zion, market reaction boils down to transparency. ‘The market doesn’t like uncertainty,’ he says. ‘To the extent a company can explain clearly how it is fixing these problems, I think that goes a long way to assuaging investor reaction.’

The bright line
Analysts, credit rating agencies and investors have received praise by some for how they’re approaching 404 results. ‘What I find very encouraging is that the investment community has been broadly sophisticated in its attempt to understand why companies have material deficiencies,’ says Paul Reilly, CFO of Arrow Electronics, which passed its 404 hurdle. ‘Remember, 404 is dealing with your system of internal controls. It does not mean your numbers are incorrect. It may be an indication that you need to invest more time, effort and better resources into a more efficient system of internal controls. But it also means you have the opportunity to ensure your numbers are correct through substantive testing.’

First time around, the learning curve has been pretty steep for everyone involved. There’s been some griping from companies about auditor inflexibility and lack of communication. Auditors have complained about companies getting started too late, or not placing oversight of 404 at a high enough level. And boards, management and investors have scoffed at the astronomical cost of compliance.

After the first round of Sox 404 filings, public company representatives, investor advocates, auditors, audit committee members, US regulators and other experts aired their comments at a roundtable convened by the SEC. Other stakeholders submitted comments for posting to the SEC’s web site. There seems to be a determination on everybody’s part to make the process go more smoothly next time around.

‘I’m encouraged by a sense of everybody understanding that the blame doesn’t fall squarely on any one party,’ says Robert Dohrer, partner in the national office of audit and accounting at McGladrey & Pullen and the firm’s co-national director of auditing services. ‘You know, management could have done a better job. There could have been more implementation guidance. The auditors could have used more judgment and more flexibility in determining the amount of work they had to do. There will be a lot of progress made to make this process more efficient going forward.’

Washington is hopeful his company has everything in place to make Section 404 compliance easier next year. ‘We thought it would probably be a one-person job with maybe a little bit of outside help, and it ended up being pretty much full time for three people with more outside help than we anticipated,’ he recalls. EnPro Industries has since added one person to internal audit. ‘We’ve got the process in place,’ Washington adds. ‘The people are here. It will be a question of continuing the things we did first time around.’

Reilly says that although his company’s Sox champions tested key controls at over 95 percent of the company’s operations around the world, he anticipates doing some streamlining next year. In April, while Sox 404 was still fresh in their minds, 25 high-ranking finance and IT executives at Arrow Electronics participated in a two-day summit for what Reilly calls a ‘did well – do better’ debrief.

The summit also provided a forum for the team to consider how it can be more definitive in identifying key financial controls and reducing the amount of testing.

Integrating 404
‘Sox 404 is not a one-off event, or something that companies can focus on late each year,’ notes Reilly. ‘It’s something you need to live each and every day. We’ve now aligned Section 404 with how we actually operate the company, with how we make strategic decisions around initiatives we’re carrying out in the company to make us better or more effectively streamlined. One of the really important lessons learned is that this really needs to become part of your living culture and how you drive the business forward.’

At the same time, Reilly acknowledges the somber side of Section 404, the side that’s causing the buzz. ‘We have to be very honest with ourselves and recognize that the processes required by Sox, especially Section 404, are a bit burdensome for companies, and a bit costly,’ he concludes. ‘What we are trying to do is drive it forward to ensure we get something more than just an opinion from our auditors. But it will be difficult to get those benefits from a financial point of view [to] be the same amount of money that it costs us to do Sox 404 compliance.’

Ben Bland finds out what investors and analysts are thinking at the CFA Institute’s conference.

From spinster to supermodel is some makeover. But the once dowdy mining and metals sector has thrown away its safety specs and become sexy – fast. In March this year the Reuters CRB Commodity Index – one of the most respected bellwethers of commodity futures – came close to doubling since 2002. And natural commodity money has not just been shoveled into mining and gold stocks, but also into energy and agriculture. Commodities prices cooled recently, but many think mining and metals – after the current breather – will race forward again and keep going hard for several years.

SUNNYVALE, CA -- In a recent conference call, John Gifford, CEO of Maxim Integrated Products, a California-based tech company, said he doesn't care how the company is going to expense stock options. On the company's earnings call on August 1, an analyst asked how options expenses would be sprinkled through the company's income statement from a Gaap point of view and Gifford said: 'I don't even care. I'm going to report earnings per share, cash flow and do what whatever they require us to do for Gaap, but I don't pay any attention to it.'

Q. We’re concerned about the growing cost of servicing our thousands of retail shareholders, given their negligible holdings (below 5 percent). It makes better business sense in the long term for us to buy back as many shares as we can at a premium, but what factors should we consider before moving ahead with such an offering?

SYDNEY -- The hedge fund industry has set its sights on Asia. In the first six months of this year, a record 55 new Asian hedge funds were launched, according to the newsletter AsiaHedge.The funds raised $3.5 bn, more than double the amount raised in the same period last year.

LONDON -- Hedge funds are becoming the new face of activism. This week investors praised a group of US hedge funds for orchestrating the takeover of Medidep, a French operator of retirement homes. The group found the right buyer for the firm after unseating a board member at the company's annual meeting, allowing shareholder to obtain the best gain on their holdings.

LONDON -- In an effort increase accounting transparency, international accounting standards are now in play. While new International Financial Reporting Standards (IFRS) tighten up some formerly confusing and convoluted reporting standards, it's also causing confusion in some areas.

Earnings guidance isn’t what it used to be. But then, you knew that. A recent study by the National Investor Relations Institute (Niri) of 527 IROs shows a distinct trend toward longer-term perspectives in giving guidance. Moreover, the number of firms willing to give guidance fell to 71 percent from 77 percent in 2003.

SAN FRANCISCO -- Investors are willing to pay significant sums for added filters that signal potential red flags at companies they're following. San Francisco-based proxy advisory Glass Lewis & Co has one such product called the Monitor, which sells for a starting price of $25,000 to institutional clients. This web-based tool warns of potential problems like poor earnings or litigation developments at companies that investors follow or hold. Lynn Turner, former chief accountant at the SEC, heads the research team that developed the product.

WASHINGTON, DC -- The SEC is to hold a September 21 meeting that will likely result in the granting of a one-year extension for small companies to comply with Sarbanes-Oxley's rule on internal controls: Section 404

LONDON -- In the dash for yields, hedge funds and private equity funds have become powerhouses to be reckoned with, as they rapidly replace many of the traditional investors companies are used to dealing with. So concluded a panel of experts at the International Investor Relations Federation (IIRF) annual conference in Amsterdam last week.

TORONTO -- A clear divide emerged between large and small companies at the first IR Magazine Canada Think Tank on September 29 at the TSX Broadcast Center in Toronto. Around 40 IROs invited to participate spent the day wrestling with four key issues chosen in an advance poll: the relationship with the sell side, earnings guidance, IR and the board, and targeting overseas investors. At every turn the IROs defied expectations: most don't want more analyst coverage, don't provide earnings-per-share (EPS) guidance, don't want closer contact with the board and don't target overseas investors.

First, let’s take a look at what has happened recently in the stock market. It was a rough second quarter. Following on the heels of April, when the S&P/TSX Composite Index rose 0.9%, the market dropped 3.6% in May and 0.8% in June. Readers of the May Newsline may recall that I expected “increased volatility in capital markets” and recommended that investors with a more conservative risk profile “increase cash holdings and defensive positions in their stock selection and industry weights”. Not a bad call as it turned out. But where do we go from here and what does this all mean to IROs?

Investors are interested in quantifying the effects of climate change but a consensus on what companies report and what shareholders measure is necessary.

Providing earnings guidance is neither a necessary nor a sufficient condition for good performance and stock market success. If your company is currently providing guidance but is questioning whether or not to drop it, will this be damaging? If your company currently doesn’t follow this practice, but your competitors do, is that decision doing your company harm? If your company has grown to mid-tier size, should you be providing guidance? The answer to all of these questions is a definitive maybe. But let’s address the whole guidance issue first.

The role played by an IRO is very important. But the role played by a small cap IRO is crucial.

The notion that the income trust sector has been a boon to both investors and issuers is a massive understatement. But there is a direct correlation between risk and return.

I remember vividly a meeting I once had with a former CEO of one of our major chartered banks. He was summarizing the history of bank lending. The bottom line, he told me, is that if a sector was growing like a weed, it was probably a weed.

Sage advice, that. I have often looked at sectors that way – wondering where the 'weeds' are or where they will show themselves. My motivation is to determine which sectors are the riskiest and should be avoided, or at least de-emphasized. As far as the present cycle is concerned, we've seen tremendous growth in two distinct areas: hedge funds and income trusts. Let's examine the latter.

Until very recently, portfolio managers have been falling all over one another in their attempts to build exposure to this sector. And with good reason. First and foremost, trusts have made investors a ton of money. In a low interest rate/equity return environment, income trusts pay investors an attractive, tax-adjusted return that is clearly superior to common and preferred shares and bonds. For example, a top-quality, non-energy related large cap income trust can yield at least 6%. This knocks the socks off a five-year GIC, which yields about 4%, a perpetual preferred (4.8%) and a five-year Government of Canada bond (3.4%) – not to mention the tax advantage. And there's less than a handful of common stocks that offer more than a 5% yield; so clearly trusts have something to offer investors.

But enough about returns, how about the risks? The expression 'the bigger they are the harder they fall' may have referred to Goliath but it's far and away more applicable to the stock market. Witness the collapse of the high techs in 2000. This came on the heels of extraordinarily strong market performance. History has shown us that the greater a sector's performance, the riskier it becomes (at MFC we don't make large sector bets because typically last year’s underperforming sectors become this year’s winners). And generally speaking, there is also an inverse correlation between the popularity of a sector and the quality of the underwritings.

In any underwriting cycle the most attractive underwritings (and, perversely, those perceived as riskiest) come to market first. Generally speaking, the longer that underwriting cycle lasts, the less the quality, liquidity – and perceived risk of the IPOs. Eventually every sector becomes saturated, every underwriting cycle lacklustre – and the buyers lose interest. In the latter half of an underwriting cycle, many 'investors' are buying these stocks based on the Greater Fool Theory. That is, no matter what the product, there will always be a greater fool out there to buy what I have to sell (although, for the record – I do not buy IPOs).

Underwriters give their investor friends great fills on issues (because they pay their broker buddies whopping commissions) and then they flip them to investors who got a lousy fill and want to buy more (thereby giving their buddies even more commissions and ensuring another great fill on the next hot issue).

Are we at this stage of the underwriting cycle? Is this market saturated? It's hard to say but so far the total market capitalization of income trusts is over $150 billion. If we're not there, we're probably getting close.

There have been numerous consequences of this 'trend to trust' and portfolio managers have mixed feelings about it. As a result of the trust mania, we have a greater variety of sectors to invest in – and that's a plus. Companies with stable and mature businesses have been able to sell themselves or a division to investors at prices that exceed their value as common shares. (Perhaps the ability to spin off an undervalued or underperforming division has kept a mediocre management team in place longer than otherwise would have been the case.) Or, instead of selling a division to a competitor or undergoing a takeover or a merger of equals (either of which can be very rewarding for investors), companies have been spun off as income trusts.

In essence, what I'm suggesting is that being spun off as an income trust is the easy way out – the tougher, more time consuming (from a long-term capital market perspective) option of improving existing operations or making a business a stand-alone publicly traded and viable common equity entity is forsaken. And as a result, investors are precluded from participating in potentially new and profitable equity investments. And that cannot be positive for the longer term.

For the Canadian equity market to prosper and thrive we need a broad array of stocks that are profitable and have good growth prospects. It is difficult for trusts to grow, as most of the cash flow is distributed to unit holders. There is no cash left to reinvest for the future. Consequently, growth must be financed by equity issues – something that is not always possible. How many potential Canadian National Railways, Loblaws and Shoppers Drug Marts have been denied the opportunity to grow and prosper as common equities because they wallow as income trusts?

And now, the last risk – interest rates. While I do not perceive this as a huge risk for the foreseeable future, income trusts are yield vehicles and everything has a cycle, including interest rates. I strongly believe that there are many investors out there who bought these animals because they were hot, not because they wanted income. When they start to go down, either due to a pick up in interest rates or because another hot underwriting cycle has begun, trusts will be sold because many investors have too much exposure to the group (and let us hope that none of the really big trusts have a major blow-up due to a governance-related matter).

Who will 'investors' sell them to? If they can't get the price that they want for their poor quality or illiquid underperformers (the trusts they try to get rid of first), then they will sell the large cap blue chip trusts. Consider your company: if it owns, say, 75% of a subsidiary that exists as an income trust and it decides to do a secondary offering, good luck to you if the cycle has topped out. You'll find more chicken with teeth than willing buyers of size.

And what about your personal portfolio? If prices of trusts are falling because of a back-up in rates and a widening of the interest rate spread, do you still want to own trusts if there is a 15-or-20% downside risk?

Pray that you are never in the middle of a crowded theatre when somebody yells fire.

Contrary to popular belief, long-term investors are not modern-day oxymorons. They exist, do good work and are successful. But where are they, how can you find them and do you need them?

A must-attend event for financial advisors, asset managers, fund companies and consultants interested in socially responsible investment (SRI). If you have clients who want socially responsible or sustainable investment services, this is the place to learn the latest developments in this growing field.

Newsline Volume 15 Issue 2 – March 2005 A Fund manager’s view

Rating Version Three of ‘Board Games’
Newsline - A Fund Manager’s View Volume 15 Issue 1 January 2005

Fund Manager’s View Column from Newsline Volume 14 Issue 4 – July 2004
Mamma, Don’t Let your Children Become CEOs

Fund Manager’s View, Newsline Volume 14 Issue 2 March 2004

Congratulations IROs! The Toronto Stock Exchange has just introduced an interesting trading option that will make your job a little bit easier. And it’s being offered for free!

Canadian IR Practitioner column Newsline Volume 14 Issue 2 March 2004
Regular face-to-face contact with investors is critical to the success of an investor relations program. A road show can help boost visibility, get your story to the right investors and build management credibility.

Stephen Walker,Managing Director, Canadian Research, RBC Capital Markets and Irene Nattel Managing Director, RBC Capital Markets were the speakers at today's CIRI Quebec Luncheon. Provided here are the PowerPoint slides from their presentation.