Do You Know Your Investors?

The network-driven world of shareholder prospecting and management is costly and inefficient

Sifting through the universe of institutional investors outside of current shareholders can feel like a much more intimidating task. The time, resources and quantitative rigor required to collect, curate and analyze a list of potential institutional investors is extensive (not even including mutual funds and sub funds). Creating a comprehensive, holistic methodology of selecting shareholders is extremely difficult given the existing universe of unconnected and inaccurate datasets. If and when the data can be wrangled, common shareholder targeting methodologies may not be fruitful. For example, one targeting practice involves peer holding aggregations. This methodology requires findings investors who own peer companies, and suggests those investors who have significant peer ownership would be strong outreach targets. Looking at overlap among peer investor bases works for some but runs into significant issues if a company lacks peers that are similar in business type, equity value, and geography.

Investors make investment decisions by evaluating both company specific characteristics and macro trends. Investors have mandates for what they invest in, and while those mandates may be non-public, rules and patterns can be discovered when evaluating the distribution of portfolio assets over time. Mandates companies must consider when evaluating their fit as an investment candidate include:

§ Geography: funds are region focused including: US, ex-US, developed ex-US, emerging, Europe, EMEA, Asia-Pacific, Japan, Global, etc.

§ Size: funds are size focused, including: small-cap, mid-cap, smid-cap, large cap, all-cap, etc.

§ Financials: funds are focused on certain financial metrics, including: growth, valuation, income, and capital return

§ Industry: at a given time, a fund may choose to be overweight a certain industry or sub-industry

Thus, meeting with correct investors more of the time can lead to higher, less volatile stock prices, creating significant corporate value and high returns on management time.

Drawing on research from Bushee (referenced above), Floatspec classifies institutions along two factors: portfolio concentration and average holding period.

· Fundamental investors are institutions with long average holding periods and high portfolio concentration. They are likely to take significant positions in companies and ignore short-term earnings noise for long-term performance.

· Indexers and enhanced indexers are institutions with long average holding periods and low portfolio concentration. While they invest for long periods of time, their positions are generally smaller and less variable, making it more difficult for IROs to make a significant impact.

· Temporary investors are institutions with short average holding periods and low portfolio concentration. These investors are buying briefly to correct for a market mispricing rather than holding for a long-term view. Relatively small positions mean these investors make poor meeting targets.

· Activist and event-driven investors are institutions with short holding periods and high portfolio concentration. These investors are either pushing the company to make changes or taking a view on an upcoming corporate action or event. These meetings should be approached with caution and require an informed and prepared IR and management team.

Given the significant costs to investor outreach, companies should pursue meetings with fundamental investors and some enhanced indexers. Floatspec classifies investors along this methodology using our proprietary measures of portfolio concentration and holding period, and plot them for easy viewing and comparison.

Investor targeting and engagement can be impossibly complex for companies when done internally and frustratingly incomplete and inaccurate when delivered by brokers or consultants. The return on time spent organizing investor communication is very low with the current technologies available to corporate management teams and investment relation professionals. Having a grasp of the universe of investors and the fund-specific characteristics that drive their investment decision making process is paramount for companies who strive for a productive relationship with their shareholder base and the market broadly. Attracting and retaining quality, long-term shareholders has a measurable positive impact on stock performance and corporate efficiency.

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