Consider this startling statistic: In the early 1960s private investors owned more than 50% of the UK stock market. This figure dropped to around 12% by 2014, and the most recent report from the ONS puts it at 13.5%. So, when it comes to investor relations, why should quoted companies care about private investors if they’re so thin on the ground?
The recent history of the UK stock market has been dominated by the rise of the overseas investor. Since the early 1990s, foreign ownership of UK listed equities has soared, from under 20% to over 50% as of today. Alongside this, the other most startling trend is the decline in ownership of almost every other type of investor – including pension funds, insurers and other institutions. But what might come as a surprise to many is that individual private shareholders are now the second largest group of shareholders, after overseas investors.
Private investors, otherwise known by the slightly disparaging term of ‘retail investors’, now account for around 13.5% of the market in UK equities. Yet, when it comes to investor relations, they are often dismissed by investment ‘professionals’ and corporates as poorly informed and unreliable; and at the extreme end of the spectrum, they can even be seen as a nuisance. But the fact is that fostering a private-investor shareholder base can be highly advantageous for a company, especially those operating at the small- to mid-cap end of the market.
For starters, private investors are less fickle and tend to churn stock less often than institutional investors. According to Link Asset Services, retail investors hold onto a shareholding for five years on average, versus around two years for institutional and foreign investors. This is really significant when it comes to developing a loyal and supportive shareholder base that can be relied upon through good times and bad.
What’s more, private shareholder numbers are on the rise following the recent changes to pensions and ISAs. The pension reforms introduced by George Osborne during the Cameron government have led to many pension savers taking control of their investments via a SIPP (Self Invested Personal Pension), often in order to avoid the poor returns offered by annuities in the wake of quantitative easing and low interest rates. This, along with the lifting of ISA restrictions which barred AIM shares from being held within an ISA, has opened up a new wall of private-investor money to the markets.
But there are new challenges arising for companies looking to engage with private investors, especially at the small-cap end of the market. The advent of Mifid II (Markets in Financial Instruments Directive) has impacted the amount of AIM company research in circulation and available to private investors, thus exacerbating an already bad situation – a fifth of the UK’s 2,000 smallest public companies already have no research coverage at all.
With all this in mind, ambitious smaller companies will have to find new ways to engage with existing and prospective shareholders. Events like the Master Investor Show, where listed companies can meet thousands of private investors during the course of a day, are becoming part and parcel of the investor relations landscape. Nothing beats face-to-face contact when it comes to securing and maintaining the trust and respect of shareholders – something which is all too easy to forget in an age of digital communication.