Time for IROs to broaden their areas of expertise, argues consultant
Passive investing has become a prevalent influence in the markets. Twenty years ago there were just a few market indexes, but today there are more indexes than publicly traded stocks. According to Citi Research, passive investments that track these indexes account for about 45 percent of US large-cap equity mutual funds and exchange-traded funds and 39 percent of small caps.
On the Wall Street/capital markets front, the trend toward passive investing through index funds as well as quantitative investors using algorithmic methods for selecting stocks or baskets of stocks, is having – and will continue to have – an increasing impact on the shareholder base composition of public companies.
‘The impact of this trend is having a pronounced effect on small-cap companies that have limited free float relative to larger companies,’ explains Fred Buonocore, senior vice president of the Equity Group, an investor relations firm in New York.
‘Many small-cap companies have fewer than 25 institutional holders with meaningful-sized positions to begin with and, as a greater percentage of outstanding shares move into the hands of passive investors, the opportunity to positively influence portfolio manager decision-making by communicating a company’s fundamentals and outlook appears to be diminishing.’
While the increased prevalence of passive investing may seem to point to a declining need for active company communication with Wall Street, in actuality it changes the nature and complexity of the dynamic. Passive firms often want to communicate with companies, but their issues of interest tend to be governance-related as they carry out their fiduciary duties toward their clients.
‘IR professionals need to broaden their areas of expertise beyond their company’s business models, operations and end-markets, and become more sophisticated in discussing the fine points of governance matters such as executive compensation, board composition and selection, diversity and sustainability,’ says Buonocore.
Additionally, with some algorithms designed to assess changes in companies’ tone, well-crafted communications are as important as ever, for both active and passive investors.
Click here to read parts one and two in this series: From politics to regulation and Europe: US small-cap challenges and Interest rates and the labor market
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