September 2006 CFO Forum Best Practice 2006 1
GROWTH VS. VALUE INVESTORS; GROWTH VS. VALUE INVESTORS; DOs AND DON’Ts IN MANAGING DOs AND DON’Ts IN MANAGING
EXPECTATIONSEXPECTATIONS
By Aviv Boim, CFOBy Aviv Boim, CFO
CFO BEST PRACTICE 2006CFO BEST PRACTICE 2006
CFO Forum, Eilat, September, CFO Forum, Eilat, September, 20062006
GROWTH VS. VALUE INVESTORS; GROWTH VS. VALUE INVESTORS; DOs AND DON’Ts IN MANAGING DOs AND DON’Ts IN MANAGING
EXPECTATIONSEXPECTATIONS
By Aviv Boim, CFOBy Aviv Boim, CFO
CFO BEST PRACTICE 2006CFO BEST PRACTICE 2006
CFO Forum, Eilat, September, CFO Forum, Eilat, September, 20062006
September 2006 CFO Forum Best Practice 2006 2
Who is Wall Street for an IL Company?Who is Wall Street for an IL Company?Who is Wall Street for an IL Company?Who is Wall Street for an IL Company?
Financial Investors U.S. fund managers, with a range of strategies and
industry / geographic focus. Typically meet management on a regular basis
London – mostly emerging markets or European dedicated funds. Typically involves hands-on DD
Israeli funds - rely on meetings with management and local research analysts
Retail investors across the World Wide Web, literally! Research analysts
Financial buy side and sell side, mainly U.S.-based but also local analysts
Marketing research agencies in the field Financial as well as marketing press agencies
September 2006 CFO Forum Best Practice 2006 3
Who is Wall Street (cont’)Who is Wall Street (cont’)Who is Wall Street (cont’)Who is Wall Street (cont’)
Press interviews and conferences of all sorts, addressing directly or indirectly your company and field, e.g. a negative Wall Street Journal column on your peers could cause your share price to crash
September 2006 CFO Forum Best Practice 2006 4
Channel ChecksChannel ChecksChannel ChecksChannel Checks
“Channel checks” – what does it mean? Communications that research analysts are making
with your suppliers and contract service providers, in an effort to gather information on recent events and dynamics that did not become public
Although such communications are likely to breach confidentiality undertakings, they are hard to prevent
In most cases, the results of such checks are released in a note by the analysts days prior to the Company releasing its results; your ability to respond is limited if at all
September 2006 CFO Forum Best Practice 2006 5
A Closer Look into Types of Funds/InvestorsA Closer Look into Types of Funds/InvestorsA Closer Look into Types of Funds/InvestorsA Closer Look into Types of Funds/Investors
The focus of the fund/investor can be divided into the following main categories: Growth vs. Value analysisLong vs. Short positionsFundamental vs. Technical tradeMomentum driven Event driven (M&A, spin off, hedge convertible
issuance etc)
Each of these investor types is looking for a different edge to satisfy its investment criteria, and these criteria could conflict
September 2006 CFO Forum Best Practice 2006 6
Market and Technical ThresholdsMarket and Technical ThresholdsMarket and Technical ThresholdsMarket and Technical Thresholds
A number of market and technical thresholds are key in the evaluation for almost all types of investors: Market capitalization Trading volumeShare price volatilitySimplicity level of the business modelKey parameters of the financial results
(profit/loss, EBITA etc)
For each fund, your market data and parameters could work either way and influence on building or dropping a position
Although it seems like a “chicken and egg” situation – there are always funds with investment policies that will suit your company, almost by definition
September 2006 CFO Forum Best Practice 2006 7
The Investment Message to the StreetThe Investment Message to the StreetThe Investment Message to the StreetThe Investment Message to the Street
First of all – it should be ready and up-to-date at all times, irrespectively of the business cycle and environment
The message should be: Clear and coherent Consistent, subject to market dynamics Easy to understand by a generalist; most of the funds
don’t have the time/ability to dive into the details Unified message – Regulation FD (Fair Disclosure)
addresses it; be strict on “material releases policy” avoid preferential treatment to “smart” investors
Second, it should address: The company’s business model Risks and the potential upside Short vs. long term milestones and triggers
September 2006 CFO Forum Best Practice 2006 8
The Investment Message (cont’)The Investment Message (cont’)The Investment Message (cont’)The Investment Message (cont’)
Funds do compare their notes of most recent comments made by company’s officers; message that varies and is not unified will hurt credibility
Short term and long term company business targets – their fulfillment or push-backs could have a material and immediate impact on buy/sell decisions
Funds monitor the share price and technical trading parameters on a daily basis; could trigger changes of investment position
Portfolio managers are being evaluated based on daily performance, another driver for market dynamics
September 2006 CFO Forum Best Practice 2006 9
Mutual Funds – the Ultimate Shareholder? Mutual Funds – the Ultimate Shareholder? Mutual Funds – the Ultimate Shareholder? Mutual Funds – the Ultimate Shareholder?
Mutual funds focus on long only positions, with a longer ownership horizon
Market capitalization threshold is key to its investment criteria, with less emphasis on trading volume
Tend to accumulate a sizable position (over 5%) over ~ 6 month period, with room to increase over time
Focus on longer-term milestones and expansion prospects
Typically tied to “sell side” analysts, and require quality research coverage; tend to support decisions on internally developed models
September 2006 CFO Forum Best Practice 2006 10
Hedge Funds – Driving Trading Volume!Hedge Funds – Driving Trading Volume!Hedge Funds – Driving Trading Volume!Hedge Funds – Driving Trading Volume!
Hedge funds dynamically build both long and short positions; there are many dozens of U.S. hedge funds with over $1 billion in assets addressing equity (shares)
Common strategy is to be market neutral (beta 0), and reduce net long positions to only ~20-40% of total assets
As a result, hedge funds make aggressive daily modifications to holdings; the market technical thresholds of each company become key in such “adjustments”
Ability to accumulate a sizable position (over 5%) over several weeks can be a key criteria for an investment decision
Compared with mutual funds, positions of hedge funds are subject to a shorter holding period, typically 2 to 3 quarters
Higher focus on short term milestones
September 2006 CFO Forum Best Practice 2006 11
Hedge Funds – Short PositionsHedge Funds – Short PositionsHedge Funds – Short PositionsHedge Funds – Short Positions
Long/short strategy has become a common acceptable investment strategy
Short positions are used to allow low correlation to the market, typically by shorting large cap’s stock, with higher trading volume
Adjustments to short positions are made on a daily basis
Technically, it is harder to identify size and holders of the short positions;
The benefits of shorts – all positions will be covered with the opposite long trade, and typically over a limited period
September 2006 CFO Forum Best Practice 2006 12
Retail Investors – The BrokerRetail Investors – The BrokerRetail Investors – The BrokerRetail Investors – The Broker
Retail Brokers have varying investment horizons and strategies, but generally go less in depth than mutual or hedge fund investors
Brokers generally get information from research analysts, their peers and from the company; both IR and management. IR office plays an important role here
Most brokers require a complete, but simplified message and “story”
September 2006 CFO Forum Best Practice 2006 13
Retail Investors – The IndividualRetail Investors – The IndividualRetail Investors – The IndividualRetail Investors – The Individual
Individual investors generally hold small positions, but are regarded as “high maintenance” holder
Rely heavily on Internet-based sources for news, publicly available research and information on companies
Individual investors are more prone to misconception given their tendency to gather information from online message / chat boards
Be sensitive and allow such communications to flow through IR office
September 2006 CFO Forum Best Practice 2006 14
SummarySummarySummarySummary
There are hundreds of funds/investors/analysts one can meet, mainly in the U.S. and London; a proper mapping and setting the priorities of the targeted investor base is required
Understanding the investment criteria of prospective funds is important in order to have a productive investor interaction
There is no “right” or “wrong” company message; Need to have a full story, with clear and achievable short and long term business targets