Sell-Side firms are one who are looking to pitch the assets such as stock, bond and foreign exchanges etc. to the Buy-Side firms, i.e. Hedge Funds and Institutional investors to mention few. Sell-side entities such as Investment Banks, Commercial Banks, Individuals, Stockbrokers, etc. enable the buy-side entities decision-making process. The term Sell-Side is used in the financial services industry, which creates and promote the financial instruments products to a sale or make it available to buy-side entities involved in making the investments.
What is Earnings Per Share? EPS is the per share profit by a business in a given period. While analysing a business financially, it serves as one of the basic tools. EPS is calculated by dividing profits by total shares outstanding for a given period. EPS is reported on the profit and loss statement of an enterprise and works as a denominator for beloved price-to-earnings ratio (P/E ratio), used not just by novice investors but also fund managers. A business is required to generate sustainable earnings in its life cycle, and earnings or profits are essentially among major intend of a promotor. To know more about P/E ratio read: Understanding Price-Earnings Ratio But reported earnings of a business will likely differ from actual cash earnings because devising profits mandate broader accounting standards and principles to provide a fair picture of an enterprise. EPS, therefore, becomes imperative for investors, market participants and other users of information. EPS estimates are circulated by sell-side analysts to market participants. Financial Modelling is applied to arrive at the EPS estimates of future financial years, semi-annual periods or quarterly, depending on the reporting adopted by the firm. Analyst estimates are then collected by market data providers like Reuters, Bloomberg, IRESS to provide a consensus view of analysts on the business and its financials, including revenue, operating expense, earnings before interest and tax, profit after tax, EPS. Market estimates enable participants to evaluate the expectations of sell-side analysts from a particular company, sector or even index. Analyst estimates also indicate the divergence between an individual’s expectations and collective expectations of analysts that are tracking the company. An individual can, therefore, determine whether the stock of the company is undervalued or overpriced by the market against hi one’s fair value estimates that are based on the expectations from the company. More on EPS read: What Do We Mean By Earnings Per Share (EPS)? How to calculate EPS? Although general formula considers total shares outstanding in the denominator, it is preferred to use weighted average shares outstanding over a period because companies issue new shares, buyback or cancel shares. Net Income is the profit reported by a business after incurring income tax. It is also called as Net Profit After Tax. Dividends on Preferred Shares are paid to preferential shareholders because they have first right over the income of a business, but preferred shares don’t have voting rights like common shareholders or ordinary shareholders. Weighted Average Shares Outstanding is calculated after incorporating changes in number of shares during a period, and using weighted average shares outstanding provides a fair financial position of a company. Basic V/S Diluted EPS Diluted EPS is calculated after adding the weighted average number of shares that would be issued after the conversion of dilutive shares to weighted average shares outstanding. Dilutions can include share rights, performance rights, convertible bonds etc. Whereas Basic EPS is calculated by taking weighted average shares outstanding that incorporate changes to number of shares outstanding such as buyback, new issues etc. What is Adjusted-EPS? In a financial period, firms may incur one-time expenses or transactions that are not usual in the normal course of business. The objective of adjusted EPS is to arrive at a fair picture of the business, especially for financial forecasting. Extraordinary items are excluding from EPS to arrive at adjusted EPS figure. These items can include gain on sale of assets, loss on sale of assets, merger costs, capital raising costs, integration expenses etc. What is Normalised EPS? Normalised EPS is calculated to arrive at an EPS figure, which embeds the fluctuations in income due to business cycles or industry cycles. It also includes adjustments made for calculation of adjusted EPS such as one-time gains or losses. Normalised EPS is a useful measure for companies that are sensitive to economic cycles or changes in the business environment. By smoothening out the fluctuations, it provides a fair picture of the business. If a company has reported high normalised earnings over periods, it is considered that the company is less sensitive to changes in business cycles because of its stable revenues and income during the periods. EPS and Price-to-earnings ratio Calculation of price-to-earnings ratio requires EPS as denominator and price of the stock as numerator. EPS therefore becomes a very important financial metric for investors. EPS and price data also allows participants to compare the historical trends of the P/E ratio with the current market scenario and P/E ratio of the stock. How can increase grow EPS? Businesses can increase EPS by focusing on increasing their revenue, by improving operational efficiencies either by deploying technology to reduce cost, or negotiate better prices with vendors, operate in tax efficient manner, etc. Businesses can also improve EPS by undertaking corporate action such as buying back of shares. Read: Pros and cons of buybacks – Story of 5 Popular Stocks including Aurizon Good read: Every Doubt You Have On Earnings Per Share- Explained Right Here!
Who are Fund Managers? Fund Managers, aka Investment Managers, Money Managers, are the institutional investors that manage money on behalf of their clients, which may include individuals and groups. Often referred to as Smart Money, they are perceived to be equipped with better resources and information. Investment management industry is huge and includes a range of asset classes and products like equity, fixed income, global, country-specific, multi-asset, commodity, money markets, IPOs, fund of funds, real estate. A firm seeks to fulfil investment goals of the clients, which may include pension funds, insurance companies, endowment funds, charity, corporations. When you go shopping for funds, you will find a range of products from different businesses. Investment Management (IM) refers to the complete management of funds, which are invested in securities. IM professionals devise an investment strategy for the fund and raise money from the public to implement the strategy. They are not just involved in buying and selling of securities but a broader range of processes, including research, strategy implementation, development of strategy, income distribution of funds, banking, performance evaluation. Investment Management is also referred to as Funds Management, Asset Management. IM companies are traditionally known as buy-side firms since these firms mostly purchase securities, whereas sell-side include institutions that are selling the research, providing research facilities. Buy-side firms include IM companies, pension funds, insurance funds, endowment funds, sovereign wealth funds, mutual funds. These institutions invest in a significant amount of funds and invest for the purpose of funds management. Sell-side firms are more into insights, research, advisory, promotion, market-making for the companies. These firms may also provide services like broking, investment banking, advisory, and deal in transactions like IPOs, capital raising, investment research, trading and settlement. IM businesses are regulated by a market regulator in most of countries. Regulators also ensure that investor interests are protected, market ethics are maintained, and necessary disclosures and regulations are honoured by the companies. Read: ASIC Issues Notice to REs of MISs to Ensure Balanced & Accurate Information In Investment Fund Advertising Fund Management companies charge fees to their clients, which is expressed as a percentage of money invested in the fund. The revenue earned by funds managers tends to fluctuate due to market movement in funds/assets under management. Sometimes IM companies also charge performance fees depending on the stated performance hurdles. Active Management: In this type of IM, the manager seeks to invest in asset classes in an index-agnostic approach by actively picking stocks based on proprietary or sourced research rather than a benchmark. Passive Management: Passive Investing vehicles have gained a lot of demand over the past two decade, largely due to lower fees. Investment Managers benchmark portfolio to an index and try to replicate the performance of the benchmark. More on passive investing approach: What Is Passive Investing? Type of Fund Managers/Funds Equity: They invest in equity or stocks, which happen to be among leading asset classes in the history of mankind. Equity funds are relatively riskier but boast better return potential as well. Investment Managers can further segregate these funds into sectors, countries, market capitalisation. Bonds: Also known as Fixed Income Funds, the money is invested in fixed income instruments like Government Bonds, Corporate Bonds, Perpetual Bonds, Asset-backed Securities, Mortgage-backed Securities etc. Good read: Fixed Income Securities – A look Into Bonds Multi-asset: In this strategy, the objective is to invest in multiple asset classes, including commodity, equity, bonds, currencies, derivatives. These funds seek to deliver risk-adjusted returns based on the prevailing investment climate. Index: Index Funds are one of the passive investing vehicles seeking to match the performance of the underlying benchmark. These funds are available at relatively lower fee expense and provide exposure to only a group of asset classes based on the benchmark index. Real Estate: Real Estate funds invest in real assets like property and land. These funds further segregated into a type of the properties under management like commercial, retail, office, residential, industrial. Must read: Australian Real Estate Investment Trusts Global: A global fund is allocated across geographies and provides exposure to industries of other nations. These funds also provide currency exposure to the investor as well as diversification. Speciality: Speciality managers can run a range of funds based on their belief, such as e-commerce fund, agriculture fund, e-vehicle fund, disruptive or innovation fund, cannabis fund, country-specific fund, ESG fund, automated vehicle fund. Hedge Funds: Hedge funds have grown extremely popular over the past decades because of their high returns, which come with similar scale of risks. These funds invest in a range of asset classes, including commodity, equity, bonds. Investment managers charge a relatively high fee. Related: Hedge Funds Now Focused on Refined Oil Products What is an investment philosophy? An investment philosophy is something you apply when constructing an investment strategy. It is your perception of market and the wide variety of asset classes available in markets. It also reflects how investor behaviour has evolved over time. Understanding a fund managers investment philosophy is paramount. Some investment philosophies: Value Investing: Value investing is perceived as picking stocks that are available at a discount to current market price. Investors prefer businesses that are underestimated by large sections of markets, thus undervalued. Watch: Kalkine Big Story - Value Investing amid Market Correction Growth Investing: Growth investors chase companies that are exhibiting better-than-average in earnings. The expectations from growing enterprises are generally higher due to stage of business, target market, product, disruptive products. Growth Stocks have delivered substantial return over the last decade and continue to be market darlings. Related: How To Identify A Growth Stock? Arbitrage Investing: In this philosophy, investors seek to benefit from the existing inefficiency of asset prices. This practice in markets also ensures that price of asset classes do not stay diverted from fair-value for a long time. Arbitrage strategies can be applied on almost every liquid asset classes that are available to trade. Market Timing: Investors seek to maximise their returns by undertaking investment decisions based on a future prediction of the asset class. Market Timing predictions can be based on Fundamental Analysis, Technical Analysis, Economic Conditions etc.
What are Investor relations? The term ‘investor relations’ is also known as financial relations or shareholders relations. The department is a division of Public Relations that helps to communicate data and insights of a company with the investment community. The financial relations department takes care that the accurate and factual information is going out to the public. The team caters to the investors, shareholders, and other parties, who are interested in the company’s financial stability. Based on which the individual investors or the investment firms make informed decisions related to the investments. Source: Kalkine Investor Relations (IR) does not only takes care of the financial aspect but is also closely integrated with the marketing department, legal department, and the executive management of the company to effectively manage the flow of information. A public company must diligently provide financial details to its investors and stakeholders. As an essential aspect of the public relations for the public company, the financial relations team is also responsible primarily for developing relationships with the investors. It builds and maintains relationships with shareholders/stockholders, potential investors, financial analysts, the financial markets such as the stock markets and commodities exchanges. A significant responsibility of the department is having smooth and meaningful communication with investment analysts who help in driving public opinion about the company as an investment opportunity. IR department priority work is to manage these expectations. The department should generate accurate financial information for the media houses. These outside aspects play a major role in the success and growth of the company, hence maintaining a strong and transparent relationship with them is of utmost importance and priority for any public company. Do they closely work with Wall Street? Organisations top executives such as chief executive officer (CEO) and chief financial officer (CFO) have a handful of tasks in their daily corporate life. They have a business to run. Just like the public relations team is a bridge between the media and the company, the investor relations team is a bridge between Wall Street and the company. The CEO or the CFO is the face of the company, however, the IR department is usually in the middle connecting the company with investors, shareholders. What are the roles and responsibilities of the IR team? The move an organisation makes from a privately held company to a publicly traded company is a big step. It requires robust coordination to keep the company’s image while ensuring a smooth transition. The IR team seizes the interest of the investor’s community and maintains it. IRO (investor relations officer) and PRO (public relations officer) both are in charge of the flow of information going out in the public domain. They build and maintain the brand image and manage crisis situations. Their teams however not only deals with the finance aspect of the company, but also communicate with the chief financial officer (CFO) or the Treasurer and are responsible for sharing the finances of the company to three main resources - financial analysts, media, and shareholders. The success of the IR team is measured by the visibility of the company in the market, sell-side analyst coverage, and attractive higher liquidity into the company’s stock. The investor relations department is often engaged in identifying the market trends through analysing the company's stock. They also track historical deals to compare current situations. It is important to effectively screen the institutional perspective of both the organisation and the market. They analyse the factors driving the industry, helping organisation to understand the market better and also the metrics used by investors to value a company. In-depth analysis, ideas and data sets on industries, companies, credit, government, and litigation factors that impact decision making are also handled by the financial relations team. Source: Kalkine For any public company maintaining a timeline of upcoming activities is important. The public relations team focuses on media conferences, press releases, trade shows related part, whereas the investor relations team focuses on the financial calendar of the company. Their roles and responsibilities largely revolve around accumulating annual reports & quarterly financial statements, maintaining shareholder information, building and maintaining relations with them, addressing dividend & stock issues, coordinating shareholder meetings and press conferences and so on. Before going public the company wants the team to institutionalised various important aspects for the company such as set up government alliances, internal financial audits and most importantly develop relationships with potential IPO investors. Also read: What is Initial Public Offering? | IPO Explained Why are they important? In some organisations, investor relations are managed by the public relations team or by the corporate communications department. It may also be called financial public relations or financial communications. Investor relations department is considered a specialty of public relations by the U.S. Department of Labor. The department also engages with the Corporate Secretary on legal and regulatory aspects of the company. Through a financial relations team, an organisation can effectively communicate its financial strategy to the market. Do Companies hire financial relations agencies? Having a financial or investor relations team is a hallmark practice of good corporate governance. Apart from legal and accounting counsel, most of the public companies have investor relations, corporate communications or public relations teams, and strategic advisory counsel. Many companies have an internal individual or a group of employees responsible for IR, and they also hire an external agency specialised in investor relations, public relations. With this ever growing vigorously competitive market, companies find it hard to gain acceptance from the market. Having an IR team helps to get exposure in this complex market and act accordingly.