Having gotten past Halloween, we move on to the Presidential election. Whether you see it as Dia de los Muertos (Day of the Dead, the traditional South American Catholic celebration following Halloween), or a brand new day in America, it’s highly probable that the sun will come up tomorrow. If it doesn’t, well, then we’ve got real problems.
TRAVEL: Catch you at the NIRI Capital Area luncheon in Washington DC Nov 12. See link to calendar below for details.
We must point out how the October 21 edition of the Market Structure Map said to expect a good finish last month, with counterparty obligations less than thought, thus fueling equity inflows. This was simply a function of considering market structure.
Here’s another: Investor relations officers, have you thought how volatility affects asset-allocation institutional investors, and what it means to targeting efforts? For instance, the California State Teachers Retirement System (CalSTRS) will vote Nov. 5 to increase margins of error for allocations. CalSTRS had earmarked 9% of assets ($147 billion total assets under management) to private equity, 20% to international public equities, 40% to US equities, 11% to real estate and 20% to fixed income. With markets swinging like trapezes, CalSTRS is frequently and markedly out of whack with its investment targets. Rather than rebalancing constantly, the fund hopes to win leeway for much greater fluctuation. The fund will re-assess assets and liabilities (what we always talk about – this is how institutional investors think these days) next year, and we believe, more frequently than it has in the past.
What’s it mean? One possible outcome is more opportunism on the part of these big investors, since they’ll be able to target winning opportunities and exceed asset-allocation models by greater margins, at least for periods of time. Keep in mind that markets turn on two core gears: mathematics, and human nature. These gears drive three wheels: rational thought, risk-management and speculation. There in a nutshell is the essence of modern equity markets. The breakdown of risk-management, the prime brokerage confidence crisis, and the uncertainty of asset values have combined to foster volatility on degrees seen only twice before ever, and perhaps never on this scale or continuum.
So human nature comes into play, and institutions will look harder for opportunities. This is where we believe IR folks need to think like customer-service representatives helping institutions meet their objectives. Keep your big-picture business strategy and story the way it is. But when your market structure – the nature of the forces setting price – favor institutions like this, reach out to them tactically, not strategically. If for instance, programs are moving away from your industry, creating a better opportunity for asset models to add to, say, a technology allocation, help them help you.
Bottom line: Tactical use of market structure should be a tool on the IR work bench today.
Margaret E. Wyrwas - Knight Capital Group, Inc. (Nasdaq: NITE)
Senior Managing Director, Corporate Communications & Investor Relations
Equity Analysis™ subscriber since March 2007
"In global markets driven by automation, changing market structure regulation and dynamic investment objectives, today's investor relations professionals require new data points in order to remain relevant and add value in their company's quest to reduce its cost of capital."
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