Despite their shrinking involvement in equity markets, retailer investors remain an important demographic that requires strategic and ongoing engagement.
Dramatic changes in the stock market over the last 30 years, including technological advances and the growth of mutual and hedge funds, have had a significant impact on the way retail investors interact with equity markets, according to Scott Dudley in the IR Update. The last three years have seen their participation in these markets shrink, with retail ownership of street shares of U.S. companies decreasing from 35% to 32%.
There is, of course, no one-size-fits-all approach, and the degree to which retail investments are shrinking does vary according to the market capitalizations of a given company — but overall, institutional ownership is indeed increasing. However, this fact does not lessen the importance of including retail investors in your outreach programs. According to Dudley, it merely highlights the value of understanding how your company’s shares are held.
Even as the market presence of retail investors declines (largely a result of the growth of retirement savings and investments, pushing individual stocks out of consideration), they are, for the most part, still worth courting. The shift toward retirement savings means that investors are more likely to engage in stable, long-term share holding, rather than impulsive and erratic short-term behavior.
Moreover, retail shareholders make a loyal investor bloc that is more likely to vote in accord with management than institutional players, and this loyalty can prove invaluable in a proxy fight. “At DuPont, support from retail investors and retirees, who owned one-third of the company’s shares, helped management fend off a 2015 proxy challenge from Trian Fund Management,” reports Dudley.
There are other considerable risks that can accompany high institutional ownership. For example, there is the potential for volatility if an institution suddenly rotates out of a company’s shares. An institution’s activism (its influence, or lack thereof, on a corporation’s behavior, according to Investopedia) is also worth considering — Dudley saw few firms with any sort of activist history. A strong retail base mitigates these risks.
Courting Retail Investors
If an IR team should decide to reach out to retail investors, simple and open communication is key. Unlike their institutional counterparts, individual investors rarely have their own analysts or a means of mining in-depth data, so it is critical to present this information in an accessible way. Digital platforms are proving to be an effective engagement tool for retail investors, 70% of whom report using social media to inform their investment decisions.
Mobile apps, in particular, have tremendous potential, thanks to the growing ubiquity of smartphones and mobile technology. 70% of investors under the age of 44 report using their smartphones for investing purposes, and the majority view investment apps as an indispensable tool. For IR professionals, mobile apps can provide a cost-effective and time-efficient way to reach retail investors without overextending their department’s resources.
In the end, retail investors represent a stable and loyal shareholder base that can complement institution-heavy ownership. The decision to continue courting this demographic may reap great rewards for IROs.