End of week thoughts on a variety of issues impacting investor relations, the markets and the investment community, from Chris Taylor, EVP, Global Research, Thought Leadership & Partnerships
Across the Border – Assessing International Investment in US Equities
Institutional investment in US equities is, of course, dominated by investors based in the US. Given the sheer size and depth of the institutional investment community, the size of the US capital markets and the prevalence of the S&P 500 as a key performance benchmark, it shouldn’t come as a surprise that US institutions dominate the ownership profile of most mid cap and up companies. Nevertheless, looking (and traveling) outside the US borders in search of investment dollars has become standard practice for US-based IR professionals and quite often their management teams. Spending a considerable amount of time (and money) courting money managers across Europe and Asia is driven by a few factors:
- an increase in interest in US equities by new money centers outside of the stalwarts of Western Europe, often driven by a loosening of capital controls (Australia investors putting superannuation assets to work outside of Oz is one good example);
- a never-ending search for incremental investment dollars to enhance valuation;
- a desire to diversify theshareholder base not only geographically, but also by portfolio turnover (i.e. European holders are more long-term oriented);
- a vocal CEO who feels that the company’ shareholder base should mirror its revenue stream (“Hey, we get 50% of our revenue from overseas, our shareholder base should be as diverse!”)
I’m in agreement, for the most part, if your motivation is driven by points #1 through #3 above. The last point, however, is specious. If your shareholder base is largely institutional, say in the 80% range, driving non-US investment well above its current level is essentially a zero-sum proposition. In other words, to grow non-US institutional investment you have to reduce US-based institutional investment. The transition to higher non-US investment is certainly possible, but it has its limits. Ipreo, along with others, has catalogued the growth in index investing and we noted earlier that the S&P 500 is a key performance benchmark, which often attracts closet indexers looking to beat its performance by replicating large portions of it, save an “active alpha” component. What this means is that your stock, particularly if you’re an S&P 500 constituent, has a significant amount of US-based stickiness. These factors make moving the needle on the level of non-US investment challenging.
Given these challenges, when setting out on your quest to grow international investment in your stock, it’s important that you set achievable (not CEO-driven) goals that are based on relevant data, such as the current make-up of you and your peers’ shareholder bases and investment trends and capital flows into and out of US equities. Ipreo analyzed capital flows into and out of US equities from overseas investors for calendar year 2015. The data and observations below, while interesting on their own, should be key components of your goal-setting process.
What’s Hot, and More Substantially, What’s Not
First, the big picture. Non-US investors pulled an aggregate of $50B out of US equities in calendar year 2015. Given the upheaval and volatility of the global markets in 2015, the significant level of outflows shouldn’t be treated as a trend. Nevertheless, it’s clear that, unlike US Treasuries, US equities are not necessarily a safe haven for international investors and investment flow can be materially impacted by macro factors.
Country and Metro Flows
- Investors in Switzerland and Norway top the list of the biggest buyers of US equities in 2015. However, the buying power, while significant, belies a lack of depth of institutional interest in US equities.
- Driving the increase in Switzerland was significant buying of US equities by the Swiss National Bank (SNB). Yes, this is the same SNB that controls Switzerland’s monetary policy as its central bank. SNB puts a portion of its foreign currency reserves to work by investing in the equities of developed and emerging markets. SNB uses passive, index replication to execute its investments, so don’t put them on your target list. In 2015, SNB was a buyer of more than $13B in US equities.
- Norway’s buying of US equities was driven largely by Norges Bank Investment Management. Oil prices may have taken a nose-dive in 2015, but the oil-rich country’s SWF continued to buy US equities in 2015 to the tune of $12B in net buys.
- Investors in several of the most popular destinations for companies seeking foreign capital pulled a material amount of assets from US equities in 2015. London, Toronto and Edinburgh experienced aggregate outflows of $60B.
Most sectors saw significant outflows of non-US investment. Huge outflows can be seen in Consumer Services, Technology and Industrials. Only equities in the Utilities and Financials sectors were able to attract net new investment from non-US institutions.
Flows by Investor Type
The assumption that non-US investors are long-term oriented is put to the test by the table below. Mutual Funds, Pension Funds and other traditional investment advisors led the selling of US equities. Admittedly, this group is comprised of a diverse set of money managers, but the broad exodus hints that macro concerns can outweigh long-term micro considerations and negatively impact holding periods. As noted before, central banks and SWFs were the biggest buyers of US equities. Again, not a great story considering that both type of investors typically utilize index replication in varying degrees, muting the impact of IR activities.
The hunt for overseas investment is a company-specific decision. There are certainly hard costs and opportunity costs that come with the courting of overseas investment dollars. Before you start, make sure the upside of your efforts align with these costs.
P.S.: Ipreo has been writing on this topic for some time. My colleague, Sudarshan Setlur, published a piece on international investing in the May-June 2010 issue of our BetterIR newsletter. (We will look to re-visit and refresh the metrics in Sudarshan’s piece in an upcoming issue.)
Matt Davis, an Analyst with Ipreo’s Corporate Analytics Group, contributed to this blog post.