Listening through the disclosure noise

The growth of investing globally is being accompanied by an increase in information, much of it overwhelming, which is the result of more stringent disclosure. According to Michael Gordon, industry professionals can make use of this excess and come away with a much better picture of the investment landscape.

More demanding regulatory regimes requiring greater disclosure by corporations are contributing to the huge amount of information now available to investors today. The challenge is to try to make sense of the mountain of information that steadily builds.

Indeed some would argue that there is too much information available, and an increasing amount of it is simply "noise" made by companies trying to impress the market or releasing more information than is really necessary just to be on the safe side.

In essence, it can be said that the marketplace is receiving more and more information which is of less and less use. It takes investment skill and experience to be able to successfully classify what is meaningful and what is trivial.

One hidden benefit for international investors is the gradual standardisation of company reporting standards to comply with regulation.

This may not always be appreciated by Australian investors who have for some time enjoyed a relatively high standard of market regulation, even though recent experiences of investors in some companies may not lead them to always agree.

However when compared to other markets, where there has been very little regulatory control exercised, Australia is generally acknowledged as having a very well regulated marketplace. This may lead to complacency in the minds of investors when investing offshore.

One trend that is helping in the development of international standards of regulation is the increasing attractiveness for international companies to seek listing on USA share markets to expand their capital raising opportunities.

To achieve such listings they must meet the standards of the Securities and Exchange Commission (SEC) including its recently adopted full disclosure provisions, known as "Regulation FD". This regulation is similar to Australia's continual disclosure requirements and requires listed companies to ensure that all information that may be material is released to the market.

Regulation FD requires companies to disclose information that is material and relating to earnings, mergers, new products, changes in control as well as other less common matters such as a change in auditors or the like.

This places constraints on USA listed companies when they give selected briefings to individual analysts or even groups of investors - all information so disclosed must already be in the public arena or must simultaneously be released to the market.

However, while this is the intention, a recent study in the US revealed that 57 per cent of financial professionals believe that new SEC disclosure rules have actually reduced the amount of security information available.

Whether or not that is in fact the case, one result of this is an inevitable increase of general market information available and greater demands on fund managers and investors in accessing, understanding, and then analysing the released material.

What it means is that researchers must become more skilled in predicting which particular announcement, of all the material released, will affect the share price and how, and assessing the impact on their own position.

Professional investment managers are again to the fore with their experience and skill combining to ensure success in this new environment

Investment management firms can no longer rely on one on one briefings by companies and the subtlety of their questioning to give them an advantage. They must now rely more on their assessment of the impact of widely available material and be capable of interpreting it more skilfully than others. This is testing the organisational aspects of investment management firms as they are receiving more and more information, which is, in part, of less and less importance.

While it has always been true that research capability and expertise gives good fund managers the edge, it now takes on a new meaning with researchers requiring special skills in collating and interpreting data from a wide range of sources. Those that do this well will be able to move quickly to take advantage of market reactions to both company announcements and those by third parties.

In the wake of Regulation FD's adoption, there are indications that at least some US companies, acting on what could be seen to be excessively conservative legal advice, are withdrawing from, or substantially curtailing their contact with security analysts, both from brokers and investment managers.

In other instances, where one on one meetings continue, it appears that some companies will stick to heavily lawyered scripts. Regardless of the question posed, the answer will be canned, whether responsive or not. None of these courses is compelled by the new regulation, and in the long run each could have adverse implications for investors and issuers alike.

A good example of this is the recent Australian Government announcement that Shell would not be able to proceed with its takeover of Woodside. The market reacted very negatively on the day of this news, almost as a knee-jerk reaction. The following day the market, recognising that Woodside had been pushed too low, then reacted with strong buying pressure, pushing Woodside up to close to its original value.

A fund manager whose analysts had done the homework beforehand and played out various scenarios would have been in a position to move quickly when Woodside reached levels that it thought good value on the day of the announcement.

So while international standards of regulation leading to increased disclosure may level the playing field for investors, it has created a plethora of information. This means that investors who can sift through all the information available and identify what is useful and interpret it correctly, will be the ones that get most value from their stock selection.

It also means that increased standardisation of listing requirements should give international equity investors greater confidence in the markets in which they invest.

Michael Gordon is the investment director for Fidelity International in Australia