Change is constant. Whether it’s good or bad, it requires us to adapt and learn new ways of approaching situations, accomplishing tasks, and managing relationships. Often, it can be unsettling, stressful, or even frightening. But change is inevitable, and when working in a function that evolves quickly (be it regulation, technology, or an unpredictable market), staying on top of the changes is critical to success. To help you stay informed and perhaps inspire your 2020 planning, here’s a rundown of the key investor relations trends we witnessed in 2019.
The rise in passive Investing
In a blog earlier this year, Amit Sanghvi, Managing Director for Europe at Q4, predicted a rise in passive investing, index funds and ETFs in 2019. He said: “Passive funds will keep growing as a total universe (and ultimately surpass active funds based on current trends)”. And while this prophecy should come as no surprise to IR professionals, the actual data is quite eye-opening. In fact, in August 2019 the investment industry reached one of the biggest milestones in its history, as assets in U.S. index-based equity mutual funds and ETFs surpassed those in active stock funds for the first time.
By the end of September, passive funds had racked up about $4.37 billion in assets, and active funds attracted about $4.27 billion. To put this into perspective, active managers made up 53% of the market in 2007. Today they only comprise 33%. Conversely, passive managers only accounted for 12%, and now are 20% of the market.
This was a particularly hot topic at our recent IR conference, where a panel of experts took a deep dive into the evolving landscape of IR and how the rise of passive investing is impacting the IR community. Karen Greene, Investor Relations Partner at Q4, noted: “the most pronounced change in the rise of passive investing is that a large portion of top holders own voting shares, who an IRO simply can’t influence.” That’s because “they’re held by a passive investor, who doesn’t want to take meetings with your management team. They’re just not subject to the same influence you have over active investors.”
With the rise in passive investing, the number of active funds (and pool of available capital) is also shrinking, making it more difficult for public companies to compete for funds. Victoria Sivrais, Founding Partner at Clermont Partners, advises IROs to “take out the passive guys and think about them from a governance compliance standpoint.” And then, “determine the active influenceable shareholders in your base. They’re the ones who you can actually influence, so make sure you’re nurturing them.”
Heading into 2020, it’s safe to say that the rise of passive investing will continue, making it increasingly critical to have a strong IR program that communicates effectively to a smaller number of active investors.
MiFID II and corporate access
2019 also saw a big change in the corporate access dynamic, with asset managers increasingly building out their own corporate access teams and hosting their own events. Coca Cola, for example, recently had their first request to be part of a conference led by the buy-side, and Fidelity has established its own global corporate access team to help facilitate meetings between corporate issuers and their portfolio managers.
In the past, asset managers would have turned to the sell-side to organize a “reverse roadshow”, but are now looking to arrange these events independently and are leveraging their own corporate access teams to take the lead and bring greater levels of expertise to the process.
In fact, in a telling 2019 IR Magazine Mifid II research report, more than a third of IR practitioners admit to having changed their approach to corporate access as a result of Mifid II. This includes owning more of the process and being less reliant on their sell-side analysts through their own targeting and outreach.
The emergence of ESG
Sustainable investing also took Wall Street by storm this year, with ESG assets more than doubling in 2019. Currently, ESG investing is estimated at over $20 trillion in AUM or around a quarter of all professionally managed assets around the world.
Reflecting on the trend, Matt Tractenberg, IR Partner at Q4, says: “ESG has been on the agenda for years, but is now gaining real traction and moving up on the priority list. There is both appetite and anxiety, especially around ESG reporting.” Going back ten years ago, the Calvert funds were perhaps the only socially conscious ones.
This is in stark contrast to today’s landscape, where almost every company has an ESG mandate. In fact, in Europe, large companies are legally required to disclose certain ESG factors in financial reporting – a ruling that affects roughly 6,000 large companies.
Chad Spitler, CEO of Third Economy and specialist in building sustainable capital markets, recently sat on a webinar panel exploring the most effective ways for companies to approach ESG disclosure and engagement. According to Chad, both passive and active investors are increasing their interest in ESG.
“Passive managers, who can’t sell securities that are held in the index, have adopted ESG as a fiduciary tool to mitigate risk”, while active managers have the opportunity to “leverage ESG in their buying or selling.”
Given the growing focus on ESG issues by investors, it’s clear that 2020 will see a rise in the number of public companies taking an increasingly active role in formulating and showcasing ESG policies. ESG is not just critical for our environment and society, but for the IROs current and future mandates.
With so much change happening in the industry, staying on top of key trends has never been more vital for an impactful IR program. And if 2019 was any indication, 2020 is sure to be another action-packed and transformative year. Stay tuned for next week’s blog where we shed light on trends to consider as we venture into 2020, and don’t forget to pre-register for our IR conference next year. It’s sure to be the must-attend event of the year.