At the annual Canadian Investor Relations Institute (CIRI) conference this past June, by the swollen, flooded shoreline of Kelowna, B.C., investor relations professionals gathered to discuss the most pressing issues facing equity capital markets today. A theme emerged. On panels and during breakouts, we pondered the decline in market participants. First, the decline on the corporate side as a result of M&A or deep private equity pockets that are keeping IPOs on the sidelines; and, second, the erosion of active investment management amidst the rising popularity of passive investing strategies.
The former phenomenon—the decline of corporate market participants—is well documented, particularly in Canada. And while this issue is troubling for IR professionals, we recognize that it lies largely beyond our sphere of influence.
The latter phenomenon—the rise of passive index and ETF investing—is a fast-moving current that IROs are trying to navigate and man- age. The role of the public company CEO, CFO and IRO has always involved the telling of a company’s story and strategy to investment professionals, in order to achieve an optimal reflection of the company’s value and potential in its share price. To facilitate effective communication, companies hold quarterly earnings calls, attend investor conferences, participate in non-deal road shows, and actively conduct investor outreach through meetings and calls. But the managers of ETFs and index-based funds are not interested in the quarterly communications cycle, and are vastly less responsive to companies’ investor engagement efforts. The passive investor will own the stock if it is in the defined index.
Active investors still dominate the market. In the U.S. and Canadian stock markets, ETFs represent just 6% and 4% of total asset value, respectively. Still, it is hard to ignore the presence of ETFs, given their growing trading volumes—accounting for around 30% of daily trading volume in the U.S. and about 8% in Canada. It’s a trend driven by ETFs’ lower fees and often superior performance over many actively managed, and more expensive, mutual funds. Moody’s Investors Service expects that by 2024 the passive money in index funds and ETFs will surpass actively managed money in the U.S.
So, what is the function of investor relations and shareholder engagement in the age of passive investing strategies? The answer is that the function evolves, but remains critical.
“Watching and listening” becomes just as important as “showing and telling.” Companies need to be familiar with the wide variety of indices that include them, and the screening methodologies for those indices. Be aware of the key items that could influence inclusion, such as market capitalization or dividend policy, and affect ownership and trading volumes.
Companies should also remember that not all ETF users are passive. There are active institutional money managers that use ETFs as part of a broader strategy, as a place to stash cash holdings or to increase exposure to certain sectors or countries. The meteoric advent of the passive investment class may also drive these “active” managers toward even more engagement with companies, as they compete to deliver attractive relative returns.
Further, some so-called passive funds are actually becoming hybrid versions, incorporating some aspects of active investing with a focus on a particular sector, market trend or environmental, social and governance factors. These fund managers may welcome outreach from a company on relevant issues. In fact, the subject of governance is one that resonates with many of the truly passive, long-term-oriented ETF managers, such as Blackrock, and this area is an opportunity for direct outreach.
In conclusion, it is clear—as it appeared to those of us reflecting in Kelowna as the CIRI conference wound down—that there is a role for investor relations in the new age of passive investing, as long as we remain vigilant and active.
Chaya Cooperberg is chief communications officer and senior vice- president, corporate affairs, at AmTrust Financial Services. E-mail: Chaya.firstname.lastname@example.org.