THE RISE OF PASSIVE INVESTING
What is passive investing?
When most people think of investing, they picture the Wall Street or the City portfolio manager who is continuously engaged in a process of ongoing buying and selling of shares, always tracking the ups and downs of the market – Active Investing. This includes includes hiring an expert (and paying a fee to cover his services) who manages your portfolio by investing in the appropriate companies in order to beat the market index.
As the name suggests, Passive Investing is a strategy that tracks the returns of a price index, and your main objective is to check that the index you are comparing against follows a constant growth factor. A passive investment fund requires almost no trading as it only changes when the index composition fluctuates.
Passive investing is on the rise
Passive investment has always been there among investors in the stock market, but it was more like a sleeping giant that woke up only occasionally. There was a similar surge of passive investors in the late 1990s and the early 2000s, and it was during this period that the ETFs (exchanged traded funds – essentially following a stock index like the S&P 500 and the FTSE 100 for example) gained some serious popularity among traders.
Due to the advancement in technologies, it is easier to manage and monitor the markets. There is software which can predict how a stock market will react to a particular change, and which can conduct a complete sensitivity analysis. New technologies have ensured that any news regarding a company of interest is immediately available for analysis for even the non-professional investors.
According to Lipper Fund Research, passive funds now account for almost 30% of total equity funds in the European market (which accounted to about only 20% for the last ten years) – a jump of 10% in 10 years and growing. In the US, the numbers are even higher with passive funds totalling to more than 40% of the total market capital.
According to a study organized by the website NerdWallet, only 24% of the total active managers can outperform their benchmark in the last ten years in the US. The writing on the wall is clear - to gain from the stock market in the long run one doesn’t have to pay extra money to managers. Passive investment is gaining an increasing number of takers.
IMPACT ON INVESTOR RELATIONS
CEOs are waking up to the reality that passive investment is making a difference to their sustainability in the market and is affecting their companies’ shares.
Investment choices not made on company specifics but market trends
The obvious impact on the IR strategy of corporates when it comes to passive investors is that they tend to focus on market trends instead of specific stocks. This means that they do not focus as much on the issuers’ results announcements or long-term strategy – i.e. no need to attend results presentations, investor days, management roadshows and review lengthy documents.
Fundamentals still work
Although at first glance it looks like there is not much to do to impact these investors, there are important aspects to consider.
Passive investors follow market trends and therefor are impacted by the rest of the market – i.e. the active investors. By communicating diligently with the active investors, you automatically “communicate” with passive investors. So, all the efforts made by the existing strategies of Investor Relations team do create impact on passive investing.
New strategies to adopt – the importance of Corporate Governance
The rise of the corporate governance concern is one of those aspects which concern both active and passive investors alike. ETF funds that hold shares in all these companies traded in the stock market have governance officers and want to be kept updated of what companies that are in their portfolio are doing. So they might be more interested in seeing a member of the board during an ESG roadshow than attending the investor day for example.
We already have seen some examples of active stewardship in investee companies by Vanguard, BlackRock and SSGA for example. Using tools like proxy voting and engagement and ensuring that the investee companies conform to the ethical, legal, and economic objectives that are aligned with the investors’ goals. This is a trend that seems here to stay.
As Richard Davies, Founder and Managing Director at RD, a leading IR consultancy in the UK, puts it: “the rise of passive investing requires the Investor Relations team to be more proactive in terms of finding active investors. Passive investors now account for nearly half of the institutional ownership of public companies in the US and some Western European markets- IR teams need to consider the needs of the governance teams at the passive investors, as they have the power at the AGM".
Also on linkedin: https://www.linkedin.com/pulse/passive-investing-investor-relations-max-khindria?lipi=urn%3Ali%3Apage%3Ad_flagship3_inshare%3B5s%2F8H8xYRpCGK0O6mfm0LA%3D%3D
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