Geoff Wicks of Reuters contrasts US and European attitudes to gathering data about the companies they invest in and using it to their advantage

The kinds of pension reforms that appear to be underway in Europe today were instituted in the US several decades ago and led to the emergence of the highly competitive, professional and aggressive US money management system we see today. US fund managers, driven to generate higher returns from riskier equity portfolios, have created enormous demand for ever more detailed and timely information on the companies and industries they follow. As US fund management firms have grown in power and sophistication, they have demanded more from their information systems and more from company management as well. As a result corporations are focusing more intensely on the true creation of shareholder value.

Will European pension systems adopt the US money management model as they push for higher returns? The developments Reuters has seen in the US may suggest some of the trends that could emerge over time in Europe.

Increased pressure on corporate disclosure

The drive to earn higher equity portfolio returns in a highly competitive money management market has led institutional investors to make increasing demands on corporate issuers for more information. The increased focus on core businesses, for example, has generated demand for more detailed disclosure by business segment.

In their valuation models, US investors typically want to break down a corporation into narrowly defined business units. For each unit, they want to understand its fundamental competitive position, its ability to generate cash flow and its cash-on-cash returns. They want to understand where shareholder value is being created or destroyed. They then hold management accountable for developing and implementing a strategy either to improve laggard operations or divest them.

More forward-looking information

In almost every information category, US institutional investors are more demanding than their European counterparts. US investors want full financial figures every quarter. They want continuous updates on current operating conditions between quarters. In fact, they prefer to know how things are going on an almost-daily basis. They also want insights into management's view of the next few quarters and years.

In fact, such forward-looking information" is now encouraged by the US Securities and Exchange Commission (SEC) and fostered by protective "safe harbour" regulations.

A 1998 survey of blue-chip US firms found that 86% provide some form of guidance to the financial community on their long-term growth prospects.

The specific practices vary widely by company, depending on the nature of their industry and how comfortable they feel internally with the reliability of long-term forecasts. Most provide ranges for the average annual growth rates they believe they can achieve over the next three to five years.

In terms of short-term forecasts, 79% of US blue chips provide some form of guidance on upcoming quarterly earnings. Only 32% provide specific quarterly forecasts for earnings per share. Others provide guidance by informally reviewing analysts' models and suggesting modifications to their assumptions that tend to bring them in line with the company's own expectations.

More direct communications with management

An October 1998 study by Broadgate Consultants found that US institutional investors are placing increasing reliance on direct contact with a company's management as their top source of information in making investment decisions. US investors want to meet face-to-face with top management. They want to make a personal assessment of the quality of management, their vision for the company's future, their grasp of day-to-day operations and, perhaps most important, their commitment to keeping investors fully informed.

Such face-to-face meetings are particularly important with cross-border investments. US investors typically are less familiar with the corporate management and culture of non-US companies than of domestic firms. They view this gap as a significant risk. Not understanding an overseas company's basic values and management competency is regarded as a good reason not to invest in that company.

In the same study, 77% of responding US institutions said they have increased their reliance on their internal research in recent years. Sell-side research is used less often.

Reuters has witnessed these trends in both of its US roles. The Reuters management team spends a significant amount of time keeping investment fund managers and analysts informed. In its role as a vendor, Reuters has seen substantial growth in the use of information and trading systems among institutional investors as their research teams have expanded.

More narrowly defined core businesses

Modern shareholder activism has its roots in the leveraged buyout (LBO) frenzy that took hold in the US in the second half of the 1980s. LBO proponents unlocked tremendous value by separating businesses from diversified parent firms. It soon became apparent to institutional investors that businesses tended to be better managed and more highly valued by the capital markets when they were focused on a fairly narrow core area. Investors became increasingly impatient with any management team, which clung to inefficient diversified operations that suppressed the public market value of the parent.

In the 1990s, US institutional investors have put increasing pressure on corporate managers to undertake the value-unlocking process themselves. Driven by various theories on how best to create shareholder value, US corporations have redefined their core competencies. Each business unit is held to tough standards of contributing to shareholder value. Non-core businesses are divested at a dizzying rate.

Reuters has taken an active approach to understanding and evaluating the views of US institutional investors. Periodically, the company commissions independent third-party researchers to interview its largest holders, both in the US and in Europe. At times, the difference in their views is striking. Such is the case with the definition of a core business.

In Europe, for example, most institutions view Reuters expertise as being broadly defined in terms of providing information and trading systems to professionals. Its European shareholders, therefore, are typically quite happy to see Reuters explore opportunities to branch beyond the financial community and into other professional information markets. The company's US shareholders, on the other hand, prefer to define Reuters core business much more narrowly, focused exclusively on the financial community.

Shareholder activism

As US professional money managers have grown in size and sophistication, shareholders have become increasingly assertive in making their interests known to corporate management. Vocal individuals, often called corporate 'gadflies,' which primarily sought structural changes in corporate governance, led the initial shareholder activism movement in the US

Gadflies typically showed up at annual meetings and theatrically challenged management on such issues as voting rights, number of non-executive directors and the creation of independent board oversight committees. The gadfly movement, however, soon gave way to a much more sophisticated shareholder activism movement led by powerful investment institutions.

Explosive demand for information

Nearly half the world's stock transactions take place in the US - 44% - and a significant proportion are focused on the domestic US market.

At any time, up to 250,000 people in the US can tap into keystations across the nation for live real-time equities news and data. There are roughly 75,000 institutional users and 175,000 retail users.

Users of information are increasing by sophisticated demanding fundamental, instore databases as well as real-time applications and analytical services.

In an effort to tap into the vast US equities market and leverage its position as both supplier and participant in this playing field, Reuters has developed products that let investors integrate data and applications from a variety of sources to help them increase returns.

At the top end of the US equity market are a relatively small number of investors who concentrate on stocks from many countries outside the US. Prices for information terminals in this 'international' sector typically exceed US$1,000 amonth. Reuters has a good US presence in this sector through its 2000 and 3000 series of products.

At the retail end of the market, revenue per access typically averages US$200 or less a month. This retail segment, along with the lower end of the institutional market, is the target market for ReutersPlus Level 1 a US real-time equity information service.

Falling between these two markets are a large group of traders, portfolio managers, analysts and institutional sales professionals. This is the target market for ReutersPlus Level 2. In addition to real-time features, ReutersPlus Level 2 offers fundamental and analytical data as well as access to browser-based content via Reuters Web, the Reuters intranet.

Cost pressures point toward fewer vendors

Reuters has a significant opportunity in the US equities market, in part because it is by far the largest domestic market in the world. As a result, the US market supports an enormous variety of niche vendors. But cost pressures are weighing on institutional investors, and they are likely to embrace products that will help them consolidate their vendor rosters to an essential few.

In this environment, it is hardly surprising that the US investor has sophisticated requirements. ReutersPlus aims to meet those needs and contains certain key data and functionality regarded as essential in the US. For instance, earnings statements and balance sheets must show complete line items rather than consolidated ones.

ReutersPlus gives investors the ability to integrate data and applications from a variety of sources - from data vendors as well as from their own intranets and proprietary applications and even from the Internet.

ReutersPlus features a long list of capabilities - real-time information, fundamentals and analytics, as well as a new delivery system and a new application. It is a blend of the best features from Reuters securities database, Quotron and the Reuters Web.

The size of the opportunity is large and Reuters has met the challenge to build the best product to serve this market.

ReutersPlus puts nearly all the information equities users need in one place on the desktop. Already highly flexible, the system goes further than competitive products in allowing a user to tailor-make the most useful, efficient and easy to use displays and analytics.

Geoff Wicks is director, corporate relations, at Reuters in London"

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