Navigating the new composition of ownership in passive investing

1388 Blog Hero Navigating the new composition of ownership 1

It’s no real revelation to say that one of the most significant disruptions in the evolving world of investor relations is the rise of passive investing.  And while most of us need no introduction to this continuing trend, how best to navigate through this disruption remains top of mind among Q4 clients, and as such, was the theme of a panel discussion I moderated at our IR conference, Power Up.

The trends behind, and impact of, a shift toward passive investing

To be clear, this is not a new trend. It began with Jack Bogle and is illustrated today by the sheer size of Blackrock. Passive investments took-off around 2009 when Blackrock bought Barclays for $14B. Since then, Blackrock has developed into a combined market cap of $70B and passive investments have grown to become about 30% of all investments — roughly a $13 trillion industry. 

In fact, Blackrock, Vanguard, and State Street are among the top ten holders of today’s stocks. To put that in perspective, Vanguard holds at least 5% of over 490 of the S&P 500 and there are actually more index and ETF funds than actual stocks in the entire marketplace. Blackrock itself manages $6 trillion in assets.

We’ve gone from a simple Dow Jones industrial average to the first index for smart data, to ESG-focused funds and marijuana stocks. Traditional active managers have even established their own index arms. The first index trust, the Vanguard 500, has grown to $400B and is still growing. State Street launched the first ETF (known as the Spider) which now has $250B in assets. This growth has been driven by lower fees and the inability of active managers to beat the passive names.

For some added context, thirty years ago, to reach 40% of your shareholder base, you’d have to contact 40 firms. Today, that number is eight. Yes, eight firms hold 40% of the outstanding shares of most companies. That is not a strategy, it’s an unintended consequence and if that trend continues, the three largest index firms will own 20% of every company within 10 years. 

Clearly, over the past decade, the rise of passive investing has been a defining theme of asset management. With this significant shift from active to passive investment, IR professionals are looking for ways to impact the decision-making process of passive investors. When it comes to being included in these indexes, there’s also increasing need for disclosure around corporate governance policy, board structure and sustainability policy.

Understanding and navigating this new landscape

During our discussion at Power Up, a panel of industry experts took a deep dive into how this new landscape impacts IROs and addressed some immediate – and often simple – steps that should be taken to manage the new composition of ownership.

These industry veterans looked at how passive investors make decisions and perceive a company’s equity story, and, importantly, how IR teams can stand out in an increasingly data-driven world. 

We also explored the nature of passive investment behavior and shared insights and actionable advice around the key themes that interest these investors, the skills IROs need to be proactive, and how your company’s business decisions can affect whether you’re included in an ETF or index fund. Panelists discussed related themes critical to IROs including:

  • Understanding how significantly passive investing can impact your job, your story, your stock, etc. This requires first knowing your company and investors, as well as where passive investors are coming from and the parameters of their investment thesis. Do you know which funds hold your stock and what that means in terms of how you are viewed? Passive investors require consideration of additional factors, especially those that move the needle long term and those that mitigate long term risk.
  • How can you meet the challenges of being included (or not) in an index? Do you know which factors affect your stock being included or excluded with passive investors? Given the growing amount of index ownership in each stock, it’s important to know why you’re in specific funds and when these files re-balance.
  • What’s the best way to engage with this growing group of investors? While clearly a different animal, there’s no reason not to create strong relationships with passive investors. In fact, simply understanding where things sit and who you should engage with can help mitigate issues before IROs receive an uncomfortable in-bound call.
  • How can passive investors’ increasingly heightened focus on ESG impact your strategy, and more importantly, your stock price? Do you understand which part of the index your company is or isn’t a part, as well as where you might fall out because of exclusions like ESG? Because passive investors expect engagement directly from companies, it’s vital to communicate your ESG efforts to the right investors with a consistent voice.
  • How can IROs ensure they’re keeping up with passive investor behavior and engagement? What are the best tools and strategies for staying ahead of the curve on things like understanding when a rebalance is coming and keeping track of the influx of new index funds, in real time? 
  • As the sheer volume of potential data points explodes and algorithms become even more sophisticated, how can IROs stay ahead of the curve and become savvier about leveraging alternative data to drive targeting strategies?
  • Understanding key trends in passive investing and how they impact the continually evolving the role of the IRO.

The conference was a huge success. Thank you to all of our attendees and speakers for joining us in South Beach and for helping us get closer to solving IR’s biggest challenges. We hope to see you again next year! Pre-registration is already open, so sign up for Fall 2020 today. It’s going to be the must-attend event of the year.

Mike Coffey is VP, Head of Solutions Engineering at Q4. For more information on how Q4 can support your stock surveillance, please email Mike at

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