According to a 2017 poll conducted by SimCorp, over 50% of buy side participants in North America said they will need to comply with MiFID II requirements. As a result, asset managers are expected to source considerably less research from large investment banks and brokerage firms, focusing instead on strengthening their in-house research capabilities. This development will likely lead to public companies increasing the amount of time they allocate to calls, meetings and conferences with buy side individuals. In addition to speaking directly with management, an increasingly popular trend among buy side professionals is their exchange of investment analyses with one another within popular, online investor networking communities such as Seeking Alpha, SumZero, Value Investors Club and many more.
These growing platforms are hotbeds of investment ideas and recommendations on public companies from hundreds, even thousands, of qualified investors. Most importantly, they often provide value when it comes to return on investment. For example, a study of long picks posted on SumZero found that they earned an average market-adjusted cumulative abnormal return of 4.03% in the 45 days after the analysis was posted. Interestingly, small-cap value stocks experienced the most positive returns.
Clearly, members of these online communities benefit from the information exchange, meaning that selective engagement with smaller funds, family offices and self-directed investors contributing to these platforms can create a noteworthy ripple effect for a company in terms of its shareholder base and overall exposure. SumZero, for example, has 16,000 buy side members in addition to 60,000 “basic” users with limited access to the content. Seeking Alpha, on the other hand, maintains a community of more than 13 million unique visitors, ranging from professional investors to academics. So, by engaging with just one contributor, a public company reaches many investors.
Online networks like SumZero and MicroCap Club have membership acceptance rates of only 15% and 18% respectively, as they seek seasoned investors to collaborate on their networks. In fact, more members were deleted from the MicroCap Club platform than there were added over the past two years. Not only are members of these online investor communities expected to submit an application with at least one convincing investment thesis, but they are also held to a high reliability standard for their future posts, ratings and comments.
Investor networking communities aren’t just traditional stock message boards, but can represent valuable sources of in-depth insight on public companies of varying market caps from individual investors, as well as buy side professionals for hedge funds, mutual funds, private equity firms and more. The information exchanged within these platforms – both positive and negative – has the potential to unlock a company’s story to a broad audience. That is why it is critical for management teams to recognize the importance of these online communities, and to understand the influence of the contributors when deciding how to allocate time for interaction with the buy side.
How can you effectively manage the proliferation of investment networking communities as part of your investor relations strategy? A few ideas:
Routinely monitor investor platforms and online communities for articles about your company. Importantly, evaluate the “Comments” section of an article, as the conversation between users around a respective post can provide additional insight into the investment community’s perception of your company, and whether or not the thesis put forth in the article is accepted.
Do not engage with members via the public platform. If there is factually incorrect information regarding your company in a posting, reach out to the writer separately to clarify the issue.
When you receive an investor inquiry, see if the individual has ever posted or provided commentary within any of the online buy side communities. A simple search can uncover helpful details around an individual’s investment approach.
Lastly, if an investor contacts you and indicates that he is working on an article for an online platform, in most cases it makes sense to conduct a call with him to ensure he/she understands the company. As mentioned above, some of these buy side communities have extremely large audiences, meaning it is vital that any investor correctly understands your company and the investment opportunity before publishing a post.
Christopher La Bella
Account Executive, IMS