The London Stock Exchange Group Yearbook 2012. Original article here.
Shopping for shares
Taking matters into your own hands and being in charge of the investment experience can be a powerful draw for private investors. Getting to know a company’s offerings, their competitors, the elements driving the industry and the management’s plans can be a satisfying way to make money, be it through capital gains or dividend returns. And as pension provision is rapidly becoming the responsibility of the individual, savers with a long-term horizon are increasingly looking to the stock market as a means to generate real returns over the longer term; the return on risk-free assets such as deposit accounts has fallen far below historic norms and may not improve for many years, according to the 2012 Barclays Equity Gilt Study.
The London Stock Exchange Group (LSEG) is working hard to come first in retail investors’ minds. In order to achieve this, the LSEG has taken lessons from Borsa Italiana and its enviably large retail investor community; over 35% of the trades on the Italian exchange are made by retail investors, compared to around 4% in the UK.
“There is a significant difference between the Italian and the UK markets. In the UK, most retail investor trading is done outside the exchange, through products such as exchange-traded funds and contracts for difference, partially due to the cost of trading and regulatory factors. In Italy the situation is the opposite,” says Gabriele Villa, head of private investors at LSEG. There are multiple reasons for Italy’s success, starting with a stronger drive amongst the country’s investors to manage their portfolios directly. The lower costs of trading has also played a notable part, meaning Italy now has nearly 20,000 private investors who trade full time. This has been great for the liquidity of the market, which again encourages more retail investors to join the fold; “They are skilled and they know the markets, so you can almost consider them similar to institutional investors.”
Participants in the Italian markets are proud of their efficient system, where the practicalities of gaining access has been simplified for both investors and brokers. “One of the main reasons Italy has such a large community of private investors is because the process of trading has been made easy,” says Franco Ravaglia, general director of Fineco Bank. “In Italy it costs less than one euro to make a trade, while other countries can charge three to four times this amount. There is also the issue of efficiency; the Italian system is very efficient, meaning we do not need as many staff to execute trades as you do in other countries.”
Italy’s Trading Online Expo is a notable example of the way in which the Borsa Italiana maintains close relations with retail investors. This annual event has become a popular venue for investors to meet brokers, issuers, trading companies and other professionals, as well as an opportunity to learn more about the various financial products available. In London, the LSEG has adopted a similar practice with its London Investor Show, intended to become a keystone event in the private investor calendar.
“Education of private investors is fundamental. At Fineco Bank we hold webinars and classes, and we organise a lot of meetings for clients,” says Ravaglia. He believes other countries wanting to improve their private retail investor communities need to lower the cost of single trades. While this means accepting lower income per trade, Ravaglia points out that the Italian marketmakers are managing to be successful with this model. Furthermore, clients are often willing to pay for educational events and meetings, meaning there is an appetite for value-added offerings.
‘Live Meetings’ is a new service by Borsa Italiana where private investors can access a video feed from conferences or analyst meetings with company managers. Investors can even submit questions for companies ahead of time, and get answers during the broadcast. “This encourages the relationships between the companies and the investors,” says Villa, adding that the LSEG is working on creating a similar offering in the UK.
When looking at the differences between the Italian and the UK system, you may be excused for wondering whether the UK system is inherently more conservative; it lags behind especially with online offerings and interactive services. Villa, however, does not think it is a question of being conservative, more the fact that the vast majority of its customer base are institutional investors, hence the LSEG has focused on catering to these. “Since the merger of the LSEG and Borsa Italiana [in 2007] there are elements from both which we are looking to expand to the other. For the UK, creating a different approach to private investors is the focus,” says Villa.
The responsibility to strengthen ties with retail investors also extends to the companies themselves. While larger businesses often have more a more structured focus on services for retail investors, this is perhaps even more important for small companies who need the added liquidity. “Excellent websites are vital in providing as much as information as possible for retail shareholders. It is the key window into a company which enables all shareholders to access directly the complete picture on the business, the management team, the strategy and overall investment case,” says Adrian Duffield, managing partner of technology, media and telecoms at College Hill, the business communications consultancy.
For investors wondering whether or not to buy a new share, having a solid amount of information readily available about the company will be crucial. “Communications with retail shareholders must be professional, with the best companies now embracing all aspects of digital communications,” says Duffield. “Many are exploiting social media as well as providing video online. Some have developed apps, while others use video as well as making full presentation at the Annual General Meeting.”
One example of how this can be done is engineering group Costain. On its website, the £136 million cap provides video updates from its chief executive officer, in addition to well-made graphics presentations on its service offerings and how this meets the needs of industry developments. Investors can view the most recent analyst presentations, and Costain will also let attendees at the Annual General Meeting see the materials made for their City analysts.
Efforts like those demonstrated by Costain are important to promote a sense of trust for investors. Similarly, companies who employ best practice communication strategies from the time of their market flotation will find retail investors to be curious about new market entrants. those willing to answer questions will look more attractive than those who do not.
Emis, the healthcare software provider, was forthcoming when it joined the market in 2010, providing a timetable, a breakdown of the float financials as well as ample explanation as to the group’s intention for growth. The Yorkshire business also keeps a Twitter presence where it not only publishes news but also responds to queries, a feature which makes the group appear open and approachable.
An alternative method for companies to keep on investors’ good side is to offer discounts on its products. This is the case for the shareholders of retailers Marks & Spencer, Signet Jewellers and the Restaurant Group, whose eateries include Garfunkels, Chiquito and Frankie & Benny’s. The likes of Unilever and Associated British Foods hand out baskets of products, while shareholders at Persimmon get 2% off the price of a new home. Perks such as these are mostly provided on the condition of investors holding a certain number of stocks; the Persimmon discount only applies to investors sitting on 1,000 shares for one year. While treats like these are nice, they should come in addition to, not instead of, thorough financial information; after all it is the performance of the stock and not the fruit basket that will make the crucial difference for investors’ wallets.