Trump turns up the heat on quarterly reporting
One of the reigning orthodoxies of financial markets is that full and frequent reporting can never be too much. Information is the vital ingredient for healthy and intelligent investor engagement. Quarterly reporting of company results – obligatory in the US – would help to moderate market shocks and surprises, while forward guidance would keep analyst expectations in check.
Public markets would be enhanced and share ownership would become more popular and widespread. So much for the theory. But reality has not met these expectations. There has been a rising volume of criticism over the requirement for quarterly reporting. Now US President Donald Trump has joined the growing volume of criticism and has called for American companies to issue financial reports just twice a year rather than four times. Trump – of all people – stepping forward with a tweet with which many of “progressive” inclination would agree? The very same.
He has asked the Securities and Exchange Commission to consider altering rules requiring firms to report every quarter. The move would improve “flexibility and save money”, he argued. “In speaking with some of the world’s top business leaders I asked what it is that would make business ( jobs) even better in the US. ‘Stop quarterly reporting and go to a six month system,’ said one”, he tweeted.
The SEC requires listed US companies to issue quarterly and annual financial reports to keep investors informed about their financial position.
The Trump administration wants to cut red tape that it says is responsible for a 50 per cent drop in companies coming to market over the past two decades, including relaxing some of the disclosure and compliance requirements for listed companies and those looking to go public.
The most pronounced concern has been the charge of “short-termism”. In recent years there has been growing criticism that the quarterly reporting of financial results shortened the attention span both of investors and of company managements. Both became more focused on immediate performance and share price response to quarterly statements. Commitment to longer term investment and strategic planning was being pushed into second place.
Meanwhile, there has been no discernible decline in share price volatility as a result of more frequent reporting, any more than the explosion in size of company annual reports and accounts has eliminated performance shocks.
But not everyone is convinced – and the case for quarterly reporting still has powerful adherents. Robert Phipps, a director at Per Sterling Capital Management, says: “If you reduce transparency, including the frequency of reporting, it is thus likely to increase uncertainty, which is the enemy of investors.”
Throughout all this, the underlying assumption was that ever more – and ever more frequent – information would help public markets to grow in public trust and attractiveness. But the opposite looks to have been the case. Many companies, burdened by the requirements of frequent reporting and frustrated by the relentless focus on the next set of results, have opted to leave the public stock markets and go private.
The ironic result is that private equity, once regarded as the playground of instant profit, long term averse buccaneers, is seen as a haven for long-term investing. As John Authers, the widely respected Financial Times columnist points out: “Increasingly, long-termism is identified with private, not public, markets. Private equity managers, once regarded as irresponsible financial engineers, now style themselves as guardians of long-term investing. Pension funds, the ultimate long-term investors, increasingly invest in private equity.”
And public markets worldwide are shrinking at their fastest rate on record. Not only has this meant a shrinkage in the accountability and transparency of the corporate sector, but also fewer opportunities for people to share directly in corporate success.
Fortunately there is a range of 20 investment trusts specialising in private equity from which to choose. Average gain over five years is 65 per cent. Top performer over this period is 3i Group with a gain of 209 per cent, followed by Electra Private Equity with a rise of 163 per cent. Coming ninth with a share price gain of 99 per cent is the Standard Life Private Equity Trust. The shares at 333p stand on a discount to net assets of 15 per cent and yield 5.5 per cent. The trust is geographically well diversified and worth considering as an Isa lock-away.
Private equity will not shield investors from the inevitable ups and downs of markets. But the investment trust route helps spread the risk – and gives private investors exposure to an increasingly active financial sector.