As many funds adjust their exposure to equities, new and better shareholder targeting is needed to ensure future liquidity
After US funds retrenched their positions during the global financial crisis, it was only a matter of time before the trend reversed. Now, finally, the pendulum has swung in the other direction and investors are increasingly diversifying their exposures to different markets and asset classes.
The trend that started in earnest during 2009 saw the emerging markets as the primary beneficiaries. According to Ipreo’s Global Equity Assets Report for the third quarter of last year, North American investors were net buyers in virtually every region. North American funds poured into Asian markets (excluding Japan) to take advantage of strong equity performance, largely influenced by a sustained period of fiscal expansion in China.
The shaky stock market at the beginning of 2010 did not stem the flow of investment into mutual funds, which saw total net inflows of $44.5 bn, according to data from Morningstar. In addition, US stock funds reversed a four-month decline, taking in around $2.7 bn in assets, and international equity funds gained more than $8.1 bn in assets, the biggest monthly inflow since December 2007.
European influence
North American investors were net buyers of European stocks, with three companies disclosing net buys in excess of $2 bn, while European investors were net sellers, with two companies reporting net sells also in excess of $2 bn, according to the analysis conducted by Ipreo.
While the trend data point toward change, however, not every issuer is seeing this reflected at a micro-level. Nils Paellmann from Deutsche Telekom’s investor relations team thinks it may be too early to tell whether US investors are flooding back wholesale into European stocks. ‘There may well be an increased level of interest from US investors but, as yet, we haven’t seen big changes of positions,’ he explains.
Last year Deutsche Telekom saw a significant decrease in trading in its American depositary receipts, which Paellmann attributes to US investors reducing their holdings and exposure. ‘So far, this trend is not reversing, only stabilizing,’ he says.
Some IROs, like Diane Dayhoff, vice president of investor relations at Home Depot, are hoping some of their pre-crisis investors will return as their portfolios recover. ‘During the financial crisis, some of our investors were forced to sell our stock when they lost money on financials,’ she explains. ‘They rang us and said, We still love you but we really have to sell your stock now because our portfolios have suffered so much because of banking stocks.’
New cycle
As well as dealing with jittery investors, some companies are coming to terms with the fact that their sector is entering a different business cycle, and consequently they must target a new investor audience.
Home Depot’s IR chief has advice for companies that are entering a new cyclical phase. ‘We were a big growth company for years,’ she recalls. ‘Then, in 2004, we knew our growth wasn’t going to continue from an earnings point of view, so we conducted analysis and realized we were top-heavy in aggressive growth investors.’
Dayhoff and her colleagues analyzed various 13Fs to identify mutual fund holders and then categorized them according to whether they were growth, momentum or value. ‘At that point we decided we needed to target more value investors, so we asked them what they needed from us,’ Dayhoff says. ‘They told us to talk longer-term; obviously they wanted longer time horizons.
‘On our next analyst day we talked from a four-year time horizon and those very same investors started buying our stock. Now we have a lot more value than aggressive growth. We targeted those new types of investors and listened to what they needed from us as a company. If there are 10 calls during the day, we prioritize who we speak to.'
Bart Gianotten from the investor relations team at Dutch firm Randstad also noticed big changes to his company’s shareholder base as its business cycle shifted. ‘When the cycle turned, US investors reacted more quickly. When our share price started to hit the bottom last March, US investors actually built positions while outflows from UK investors continued.’
Investor targeting is crucial for any efficient IR program, points out Andreas Goldau from Qtel International. ‘It is interesting to see who is holding shares in your direct competitors or who else is investing in the region or sector. A simple ranking and comparison with their shareholder base can show some surprising results.’
Deutsche Telekom also uses peer holding analysis to determine who it should be targeting. ‘We know there are major value investors that could hold us and don’t, and we are making it a priority to target those,’ notes Goldau. The firm conducts its peer holding analysis in-house at the company’s headquarters in Bonn, Germany.
At Home Depot, one member of the IR team has made it his job to check who has bought in and out each quarter. Dayhoff estimates it takes around 10 percent of her colleague’s time to perform this process ahead of roadshows and targeting initiatives.
‘We’ve always said you need to be out there constantly,’ she observes. ‘Before we travel to Boston, New York, Chicago and the west coast we use targeting information to make sure we are hitting the right shareholders. In our experience it takes a lot of touches. We have had to explain this to management: it can take 10 face-to-face meetings with management members before you can convince someone to buy into your stock.’
Ongoing work
Most IR teams see targeting as a continual consideration in their everyday work. ‘We are always trying to broaden and diversify our holdings because they are still quite concentrated,’ Paellman explains. Deutsche Telekom is more than 30 percent held by US institutions, the largest group of holders outside its domestic German market.
Issuers have often contended that targeting is more an art than a science. The complexity is compounded further by the fact that disclosure regulations differ from one jurisdiction to another. Like many US companies, Home Depot finds it harder to get data on the European investors. ‘We have more data on the US base than we do on international investors,’ says Dayhoff.
In the US, while the information is publicly filed, it is based on disclosures made by mutual funds, so there is frequently a margin for error. What’s more, the information is retrospective and prone to being out of date. Accordingly, issuers have to make use of a multitude of other information sources.
Jeannie Ong, head of investor relations at Singapore-based StarHub, believes in talking to as many contacts as possible. ‘Of course, we work with specialist vendors, too, but nothing beats talking to brokers, bankers, fellow corporates and peers.’
Despite the ambitious targets set by many, not all issuers feel they can have much influence over the composition of their shareholder base. ‘I’m not under the illusion I can change the holdings,’ Gianotten concludes. ‘I dream about value or growth investors, but I know the market will make the selection for itself.’
From zero to hero
Almost half of Open Text’s revenue comes from Europe but, as recently as 2008, Canada’s biggest software company had minimal European ownership. Today, two years into a European targeting program, nearly. 10 percent of the NASDAQ-listed firm’s shares are held in the region.
Open Text’s three main targets were former shareholders of two German firms it had acquired, investors who followed a close European competitor, and those with an awareness of Open Text’s largest partner, SAP.
Greg Secord, Open Text’s vice president of IR, says meeting with European buy-side teams has sometimes sparked interest from their US colleagues, and vice versa. ‘When you start seeing European investors, always let them know it’s not a one-off trip,’ he advises. ‘Make sure they know you’ll come back every quarter or two. You have to show them that management is committed to building a relationship.’
