Following some volatile swings on the EU’s capital markets at the start of the coronavirus pandemic, we have witnessed a recovery that can, to some extent, be put down to the rise of the retail investor. But was this just a case of “buying the dip” to attempt to make a quick profit from the crisis, or will the importance of retail investors continue to grow in the future?
Steven Maijoor, chair of the European Securities and Markets Authority told the Irish Funds Annual Conference 2020, that “if we want to see EU capital markets flourish, we need to engage far more with retail and household participants, both directly and indirectly.” He cited the case of the Autorité des Marchés Financiers (AMF) in Paris, which reported a fourfold increase in the number of retail investments being made in the early stages of the pandemic.
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4 How can IROs adjust their strategy for retail investors?
The current role of retail investors on the EU market
According to the French regulator AMF, more than 150,000 new retail investors bought stock in blue-chip companies during March 2020. In the first quarter of 2021 alone, 70,000 more individuals have entered the French stock market, making a record level of 18 million transactions. The Fédération Française des Investisseurs Individuels et des Clubs d’investissement (F2IC) has found that 16% of French individual shareholders in 2019 and 2020 were new to the market, with another 5% returning to investment, after having been dormant for at least the two previous years.
In addition, a significant finding is that retail customers quickly moved away from net divesting which was the leading trend in 2019. In March 2020 alone, they acquired €3.9 billion worth of shares — a positive balance compared to the previous year’s negative one.
Recent Euronext retail data reveals that this net investing trend continued through the following year. Ending with the most recent data, from May 2021, only two months since March 2020 have seen retail investors sell more than they buy.
The report also found that markets in Lisbon, Amsterdam and Paris particularly enjoyed increases in investment from individuals, with the retail share of overall turnover standing at 4.7% for the year to date, compared with 4.5% in 2020.
Compared with the US, retail investment in the EU is still very much in its infancy. The average number of households holding retail shares across the union, according to Steven Maijoor, is around 4%. Of course, the figures vary wildly by country, with just 1% of Portuguese buying into the market and 20% of Cypriots holding shares being the extremes. In the US, 45% of households own mutual funds.
Can retail investors move the market?
That is not to say that these investors cannot move stock markets. In fact, the trade in exchange-traded funds (ETFs) has seen a significant boost as a direct result of retail investors. The sale of thematic ETFs in Europe soared to more than €3.1bn in the first half of 2020, compared with a total of €1.1bn through the entirety of 2019. That is quite the telling statistic.
A good example of the potential effect of retail investors, the recent Gamestop saga in the United States, showed how the market can move significantly. A group of retail investors on social news and discussion site Reddit teamed up in January to buy stock in the video game distribution firm in large quantities, knowing it had previously been heavily shorted by bodies such as hedge funds. This caused short sellers to buy back in haste before their losses escalated.
The AMF does not think it is likely that something similar would happen in the EU, but it does state “it cannot be completely ruled out.” The regulator has vowed to use AI and big data to monitor equity markets and make sure it can act early if something similar happened in France. It is also developing a social media scanning tool to prevent bots from stirring up an equivalent situation.
Understanding retail investors
To be able to target retail investors, you need to understand more about them and their typical behaviours. Here are some typical characteristics of retail investors:
- An individual investor generally looks for long-term benefits from investments, dividend yield and capital appreciation.
- Retail investors often focus on the best-performing stocks, rather than creating a diverse portfolio as institutional investors, such as pension funds and insurance companies.
- Retail investors are less sensitive to the stock turnover (daily traded volumes) and thus represent an audience that can trade small tickets which favours daily share liquidity.
- ESG and sustainable investing are priorities in retail investors’ minds. During the rush for ETF products, Morningstar senior analyst Kenneth Lamont commented: “The biggest winner has been the iShares Global Clean Energy UCITS ETF (INRG) which raked in almost half a billion euros in new flows.”
- They impact the market sentiment, which is determined by a number of factors, including IPOs’ first-day performance.
- A small investor is less likely to scrutinise the company’s quarterly and annual reports.
- Retail investors usually spend less than institutional investors. However, this is not always the case. Some high net worth individuals might invest significant funds.
- The decisions retail investors make, or those made for them through their brokerage account, wealth management firms and so on, are to benefit the investor themselves, not an organisation or body.
- Investment decision making is often influenced by intermediaries such as financial media, analysts’ recommendations and even social media.
- They are less likely to attend shareholder meetings with management to gain an insight into the business but they can participate in investment “fairs” and are active during Annual General Meetings.
- The same survey found that half of French retail investors made their investments to support French companies. This is an interesting angle to consider when developing your IR strategy.
- There was a fourfold increase in the number of individual investors aged between 21 and 30 during 2020.
The impact on IR
When there is any shift in your investor profile, you can expect unexpected movements. Particularly when the balance moves towards retail investors, it becomes more difficult for IROs to judge how the company’s investor base will react to events.
Institutional investors have an in-depth knowledge of the market that retail investors may lack, e.g. about the consequences of events such as the coronavirus pandemic. This could result in retail investors reacting negatively to news that, with deeper research, proves to be positive, and vice versa. Experienced IROs will be able to gauge the likely reaction of institutional investors in advance, but there is no guarantee that retail investors will come to the same conclusion.
When addressing retail investors, IROs need to act as educators in terms of financial literacy and attempt to pre-empt situations that could lead to price volatility for entities.
How can IROs adjust their strategy for retail investors?
IROs must take into account the growing number of retail investors entering the market and adjust their strategy accordingly. Here are some tips for how to better embrace and manage your retail investor base:
1. Analyse your shareholder base
You should work out the percentage of retail investors in your shareholder base compared to institutional investors to gain a better idea of the scale of work required to embrace and educate them. To do so, you can reach out to one of our experts for an in-depth shareholder analysis. This will help you allocate the right amount and types of resources to encourage retail participation.
2. Dedicate a team member just to retail
Depending on how many retail investors you have in your base, it could be a good idea to dedicate a team member just to dealing with them. They could be responsible for imparting information in an open and easy-to-digest manner that will spell out exactly what events mean to the company’s future prospects. Having a regular advisor as a point of contact helps to build a trusting relationship and brings transparency that makes the investors more open to the team member’s explanations.
They can be responsible for digesting company information into bite-sized pieces in newsletters to help retail investors make more informed decisions.
3. Improve query responses
Timely and frank responses to investor queries are important to maintain confidence. Even though many queries might centre around details that institutional investors would already understand, retail investors are a different breed. You have everything to gain by fully informing them and showing that you take their queries seriously is important for investor relations.
4. Build relationships with ‘influencers’
Retail investors rely on influencers (brokers or financial media) to get a sense of what a company is really like. This is why it is important to engage brokerage firms and ensure they pass on a positive brand message. Hosting a presentation for brokers is one way to show how much you value their role in the process. It also gives you a chance to network with them and make a deeper connection. This allows them to inform their clients about what you do, so they have a clearer understanding before they invest.
With journalists, it is also all about forming bonds. The media is always looking for sources and experts to quote for stories and, if you, as an IRO, are available to them when they need you, you form a relationship based on trust that can also work both ways. You can gain their interest when you need it and tell your stories to retail investors through these media platforms.
5. Optimise your targeting
Having separate presentations for retail and institutional investors is a great way to hone your investor targeting. Both types of investors need different information and require different assurances. Rather than try to strike a balance with a single presentation that pleases no one, put in the effort to achieve two very different goals.
When you approach retail brokers, you might be able to access their databases of interested individuals. This will give you invaluable insight into how best to tailor your targeting and present your investment options.
6. Keep your IR website up to date
Your retail investors are likely to seek out information from all manner of sources when making decisions about your business. This is why it is important to be ahead of the game and make it most likely that they can easily find all the details from your own sources. This means making sure your IR website is up-to-date, full of the right sort of detail and as visible as possible. Tell them exactly what retail trading on the financial markets involves.
You should also look to form a strong social media presence. As seen with the Gamestop story, many retail investors take their information on public companies from social media platforms. Unfortunately, it is not always the most accurate channel so you should make sure you are there to dispel the myths and publish the content that your investors need to read. You should also monitor social feeds to be able to correct inaccuracies before they get out of hand.
7. Use digital tools to virtually engage a connected community
In the past, companies communicated with investors and shareholders primarily through live events. But 2020 disrupted this approach, perhaps for the better. Quite by necessity, a lot of IROs discovered that they could organise virtual investor days, e-roadshows and even virtual AGMs. Not only is it possible to conduct all of these events online, but many IR teams have found that this improved both accessibility and attendance.
Besides, if you look at the typically younger retail investor profile, you will probably see that these virtual means of communication will soon be essential to a successful IR strategy. In fact, Gilles David, CEO of Enertime, cites the rise of retail investors as one of the reasons companies should invest in professional, high-quality streams for virtual investor days. David advocates “emotional storytelling” as the most effective method of connecting with these shareholders.
Retail investors are especially active in their online communities and on video websites like YouTube. Maybe they will be reluctant to fly to your live roadshow that’s thousands of kilometres away, but they may easily join your virtual CEO day and decide to invest in your company. And we shouldn’t think of this as reaching or trying to influence a single person. No, with a virtual event, you are reaching entire communities because this person will share their experience and impression of your company with the group of retail investors they participate in.
8. Attend retail investor events
By being visible at retail investor events, you help them to build a connection with your business. Across the EU, there are many such events every year, giving enterprises the chance to present and retail shareholders the opportunity to ask the questions they need the answers to.
Many of these events are organised by retail investor associations, such as the F2IC in France or the Pan-Slovenian Shareholders’ Association (VZMD). This makes them excellent networking opportunities for pitching to these important investors.
9. Remember that retail investors are also employees
Retail investors may also be your company’s employees and this is worth bearing in mind when you consider how to engage with them. Dedicated and incentivised share grant programmes (free shares, stock-options, performance share plans etc.) are often designed by publicly listed companies to reward their employees for their contribution to its performance. Employees are therefore often direct owners of their company’s shares, thus increasing their sense of belonging.
As a consequence, listed companies would be well advised to implement dedicated initiatives to take into account their employees' unique perspectives and reinforce direct communication about reward plans, the company’s performance impact on the share price, trainings etc. In that regard, the implementation of compliance solutions like InsiderLog and TradeLog are a must-have for listed companies.
10. Remember to diversify
With the rise of the retail investor, it is important to ensure they form part of an otherwise diverse shareholder base. This type of investor is likely to hold onto shares for the long term, which offers some stability, even in times of high volatility such as the pandemic. Retail investors can also be more open to hearing about management proposals, which can encourage them to vote in favourable ways during proxy season. Of course, institutional investors will almost always be responsible for a large proportion of your capital but ignoring the importance of the retail investor can pose risks. So, to ensure business continuity, it’s best to target different investor categories and demographics, always striving to diversify your shareholder base.
It is likely that retail investors are going to comprise a more significant section of your shareholding as we head into the future. This is why it is important to recognise the importance of retail investors and to adjust your strategy accordingly. They may not look or act the same as institutional investors or even as retail investors have previously looked or acted, so you must get to know them and understand them. You should remember to educate and engage these potentially long-term investors and their brokers if you want to develop a mutually rewarding relationship.