In today’s capital markets, listed companies need to continue to consistently communicate and engage with a wide range of investors, whether they are current or prospective shareholders. Importantly, they also need to continue this same approach with former shareholders.
Quite often companies are unsure how to react to or manage investors who have left their share register. Unfortunately, some make the mistake to avoid them or limit their access. This response can show a lack of appreciation for the different timeframe that drives investment decisions for investors compared to company investment decisions.
Most investors take a long-term view when it comes to the management of their portfolios. This approach is consistent with their clients’ needs, which in Australia, are primarily superannuation savers. There is, however, a conflict that arises as the definition of “long-term” is rarely the same as the one that companies apply when making their own investment decisions.
The average portfolio turnover for institutional investors is between 33% and 50% per year, which is simply a two to three year holding period for each investment. For companies, on the other hand, it is unlikely that material capital investment plans would target periods of less than three years and are more likely to look beyond five years to judge a successful outcome. This misalignment of timeframes, which has always existed, manifests itself in an interesting dynamic between investors and companies.
When investors make judgements about investment opportunities, most will come to a view on intrinsic value. As the share price trades to this assessed value they will begin to realise some of their investment. When the share price reaches and exceeds their view on value they will realise the investment fully and move on to the next opportunity.
While this process may come as a surprise to some companies, the lesson is to not only accept this investment pattern, but also to continue to engage with these investors. These investors may re-join the register at any time in the future as they are familiar with the investment thesis and as part of their analysis they will continue to keep track of their entire research universe.
The critical lesson from this is to make sure you don’t limit your communications to current investors and prospective investors and apply the same communication rigor to investors no longer on the register. They know the company and always have the potential to be the next marginal investor.