David Whittaker, Senior Investor Relations Adviser

The growth in passive investing is one of the biggest shifts occurring in global capital markets. Passive funds now hold as much as 40% of total US equity market assets, up from around 20% a decade ago*. However, very few companies are adjusting their IR strategy to take account of these trends. We offer some ideas on how your company can better engage with passive investors this reporting and AGM season as their presence grows.

Passive investors include unlisted index funds and ETFs (exchange traded funds), both of which seek to mimic the asset allocation of a chosen existing index. There are also investors that straddle active and passive camps, such as quantitative investors, which appraise investments through an electronic “black box” approach where only data goes in and stock picks come out.

These investors don’t make investment decisions based on fundamental company research, understanding business models and assessing industries. They equally don’t read or value broker or other research. They are not interested in investment narrative or messaging and they don’t want to meet the company. This makes traditional investor engagement activities difficult or even impossible with these investors.

Without the need for fund managers, analysts, economists and strategists, the cost structure of index funds is very low. These benefits are passed onto investors with some offering management fees of less than 0.1%, driving demand for the products.

For listed companies, the growth of passive investors is reflected in share registers. The presence of passive investors such as Vanguard, State Street and Blackrock has grown over the last 20 years. Not only are the big players getting bigger and taking bigger positions, with a growing range of issuers, it’s getting harder to keep track of who’s who.

At reporting time, we know that active investors value quality earnings releases, conference calls and access to senior management.  But passive investors don’t need any of this. How then should companies approach IR with passive investors this reporting season? The answer is to not be passive but proactive in several key areas:

1. Know who is on your share register – Update your beneficial ownership analysis ahead of your reporting date to see who is really on your register. Identify passive funds or potentially passive funds to know who they are, what they have been doing and EXACTLY how important they are for your company.
2. Engage on governance – Passive funds don’t analyze companies and industries but they pay close attention to corporate governance, either directly or through proxy advisers. Find out about their assessment process and criteria. Proactively engage with the fund or their advisers on potential governance issues BEFORE the notice of annual meeting is sent out (many won’t engage once the notice of meeting is issued).
3. Get your financial data right – Make it easier for investors by ensuring your data is readily available on your website and contains appropriate information. For Index funds it will be ESG information and data they are looking for, while for quant funds it will be financial data. Companies should try and provide up to 10 years of financial history in as much detail as possible on their website.
4. Think about liquidity – Passive funds need liquidity to efficiently execute their strategies and manage their cost structure. For this reason passive investors tend to own larger stocks. They still own smaller stocks but liquidity becomes a bigger issue in smaller companies. If you are trying to attract more passive investors you should consider how you can improve liquidity.
5. Understand index inclusion – Liquidity will impact index inclusion, the bigger the index you can get into the more passive investors you will attract. Consider how index inclusion may affect your equity funding and understand how it fits into your long term corporate growth plan. You also need to make sure you are in the right index. Market index classifications by industry, sector and location can affect who is on your register.

* NIRI Annual Conference Papers, Orlando, USA, June 2017