Investor targeting often starts with an analysis of the shareholder register that identifies the percentage of funds held by ‘passive’ versus ‘active’ shareholders. The premise is that IR efforts will yield better results by focusing on the active holders.

And with good reason: active investing continues to represent the predominant orientation for funds under management in Canada[1]. Successfully targeting active investors remains one of the best ways to drive awareness and new demand for shares, providing positive momentum for the stock.

But in my experience, IROs can be well-served by a better understanding of their passive base as more money flows to these funds and as the behaviour of passive investors continues to change.

Passive investment is more prevalent and growing outside of Canada. In the U.S., it is estimated that 40% of assets under management are now passively managed. Assets in ETFs in Europe grew beyond the US$1 trillion mark for the first time in 2019. Although reliable stats are hard to come by, it is safe to say that few Canadian-listed companies are held exclusively by Canadian investors. Most Canadian IROs will have encountered passive U.S. and European investors on their register, particularly the large ones like BlackRock, Vanguard and State Street. (A recent Bloomberg article[2] noted that these three investors now have combined assets in excess of US$15 trillion and, on average, together own up to 22% of shares of typical S&P companies.)

Passive investing has been growing in Canada – albeit at a slower pace than elsewhere. Passive funds have seen net inflows in recent years[3]. These funds now represent over 12% of assets under management, up from around 5% in 2007. The most rapid growth has been in ETFs, which have grown from US$12 billion to US$90 billion[4].

So why does this matter? Index inclusions can lead to new entrants, driving short-term surges in volumes and price as passive investors pick up your stock (and the reverse can be true if you are dropped from an index). The higher the percentage of passive money on your register, the more you should monitor index changes. Seek out equity research analysis, which quantifies likely index movements that will affect trading in your stock, and speak to the traders regularly around quarterly index adjustments.

The line between passive and active investors is blurring. Passive investors are increasingly taking positions that see them deviating from how we have traditionally defined passive investors. They are all not strictly invested in indices. They are voting against management and siding with activists more. And some, like BlackRock, are growing their teams engaging with issuers around the world.

Being included in an index is no longer a guarantee that certain passive investors will invest. Investors have become more opinionated on a broader range of ESG issues. One of the world’s largest funds, Norway’s global pension fund, is a leader in this area. It publishes its exclusion list, highlighting the reasons it will not invest in certain companies. And the list includes four large-cap TSX Composite constituents – Barrick Gold, the world’s second-largest gold producer (a $43 billion market cap company) as well as Emera ($15 billion market cap), Capital Power ($4 billion market cap) and TransAlta ($3 billion market cap). With the focus on ESG and disclosures around the Task Force on Climate-related Financial Disclosures (TCFD) looking set to intensify, certain companies may find the universe of passive investors willing to invest more limited, and their attention to disclosure documents and ESG ratings even greater than before. Consider whether this could impact your company and whether more or different disclosure or engagement may be needed.

Passive investors are among the investors flexing more muscle in contested situations. Don’t assume you have their vote. Like active investors, passive investors are less likely to automatically support management in proxy contests. This can become highly relevant at key moments if passive investors represent a significant shareholding. Passive investors have had a long history of voting their shares at AGMs and on transactions. However, Kingsdale Advisors’ 2019 proxy review noted a shift away from the top 100 investment firms automatically supporting management in contested situations. They highlighted that, in 2019, the top firms (which include passive investors) voted all or partially against management in 40% of cases. It can be complex to determine how you can influence the votes of passive investors in contested situations. Trying to do so in the midst of dealing with a contentious issue may be too late. If you use advisors in planning your AGM, work with them to build a list of key investor contacts and keep the list updated from year to year. Knowing the right person to contact is essential if you want insight into how the investor intends to vote. While there is no guarantee that your call will be returned, if you reach out, making the effort early will put you in a better place should things become challenging.

Navigating the passive investor universe remains complex and things are continuing to evolve. When I first started in IR, there was a clear differentiation between ‘the people you can speak to’ (the active portfolio managers) and ‘the rest of the money’; the idea being that you don’t need to engage with the latter group and its members are unlikely to ever engage with you. That is changing.

Today, investors are expecting more from issuers. In terms of helping issuers understand what they are looking for, investors like BlackRock and Norges are leading the way. Larry Fink, Founder, Chairman and CEO of BlackRock, sets out in his annual letter a clear set of principles by which BlackRock expects all companies to abide. BlackRock’s engagement team is based in New York but is active globally and has grown to 45 people. At a recent event in Toronto, Michelle Edkins, who leads the team, noted its size has increased by 33% over the past two years as it engages more and conducts assessments of governance and business practices at the companies in which it invests. Last year, the team led about 2,000 engagements with companies globally. In general, most involved a 45-minute phone call while approximately one third to one half consisted of more intensive discussions.

Where to start, what is changing and how involved IR can and should be varies by investor. In Canada, players like BCIM have historically been easy to reach out to but others have engaged via proxy advisors or through organizations like the Canadian Coalition for Good Governance (CCGG), rather than interacting directly with companies. Engagements can be with IR or may be initiated via the Board or the CEO. Voting record information may be sent directly to companies in some cases, but in others the IRO may need to seek this out via investor websites. Look for opportunities to hear governance and engagement leads when they speak at conferences or events to help you gain insight into how each passive investor is looking to engage. Finally, have a clear and well-thought-out message, especially if you plan to be proactive.