The analogy between product marketing and investor targeting should take into account important differences that cannot be overlooked:

Figure 1: Stock Price Performance Relative to Competitors

Positioning the Product

A prerequisite to successful marketing is for the message to correctly reflect the product’s key attributes. Additionally, it is crucial to differentiate the product from competing products in the market, including traditional and nontraditional competitors. For instance, Coke’s traditional competitor has long been viewed as Pepsi; however, Coke also competes against other beverages that compete for the same consumer dollars, such as water, juices, coffee, etc. That explains Coke’s and Pepsi’s entry into the market for non-carbonated beverages.

When applied to investor targeting, this means that companies need to understand the key attributes of their shares, as opposed to their company’s, in order to market the stock successfully. Furthermore, companies need to identify the other stocks that are competing for investors’ dollars — competitors for capital. Such competitors may or may not include competitors within the same industry, since the company’s industry is not typically the first item in the selection criteria of active buy-side investors. The interest of such investors is generally driven first by market capitalization, then financial fundamentals (combination of value, growth, and income), then the position in the industry (leader versus laggard or turnaround story), and finally the industry in which the company competes. Therefore, a good grasp of fundamentals, both absolute and relative to relevant peers and the market, is essential for investor targeting.

In fact, comparison to industry competitors may be irrelevant and sometimes even misleading, as Figure 1 illustrates. Each point on the scatter diagram represents an institutional investor, with the coordinates being the weighted-average projected long-term EPS growth and leading P/E multiple of stocks in their portfolio. Investors clustered on the left side tend to be conservative investors with value and income investment approaches; those on the right are less risk-averse and more growth-oriented. The company’s position on this spectrum determines the type of investor that it inherently attracts. When the company and its industry competitors are positioned on different areas of the graph, as is the case often (compare XYZ to GHI), the company is fundamentally different and should not automatically target the same investors who happen to hold its competitors.

This is a somewhat simple yet crucial point to make. This two-dimensional look is only one part of the whole picture, but it highlights the basic differences that may distinguish a company from competitors within its industry. This does not mean that companies should put special emphasis on investors’ “labels” (growth versus value). Since such descriptions are broadly defined and based on portfolio averages, they may represent narrow descriptions of investors (many growth investors have value funds and vice versa). As discussed later, a closer look at investors’ portfolios is necessary before determining which investors represent good targets.

Understanding the company’s investment characteristics is also important for differentiating its shares from competitors’ shares. In order to attract new investors and maximize shareholder value, it is essential to understand how investors are valuing the company, which factors affect their value assessment, where the company outperforms and underperforms competitors, and its market overall. Fundamental measures of performance (such as growth, profitability, leverage) and market measures (valuation, yield, growth, liquidity, etc.) should be equally understood. Companies should focus on future projections and expectations when making comparisons to competitors because investors are forward-looking in their evaluation of potential investments.

Defining the Target Customer

Armed with a good understanding of investment strengths and characteristics, the next step is to define the target investor. There are more than 10,000 institutional investors with about 30,000 mutual funds globally. The objective is to narrow this universe to a manageable group.

The main attributes of the “model shareholder” for a given company are fit, impact, and quality. Companies should look for investors who: are a good fit with the company’s investment characteristics; can have a meaningful and positive impact on valuation; and tend to be high-quality shareholders. Fit is necessary to increase the likelihood of attracting investors (hence, enhancing efficiency and effectiveness). Impact maximizes the return on investment of the marketing effort, and quality ensures that success in attracting investors is value-additive and sustainable.

A company fits well with an investor if the investor exhibits preference for the company’s investment attributes. Fit can be gauged by analyzing the distribution of investors’ portfolios and mutual funds along a number of financial measures to determine whether they tend to favor performance and equities similar to the company (overweight relative to relevant market benchmarks such as S&P 500 index, S&P 600, Russell 2000, etc.). “Similar” varies per company, but includes: stocks that are financially comparable (fundamental peers); companies in the industry with comparable size; and other companies that share one or more relevant investment characteristics.

In addition to fit, companies should also take into account investors’ potential impact should they decide to invest in the stock. Fit alone does not make a good target; if the investor is not able to potentially invest a “significant” amount of capital, then they should not be a high-priority prospect. There are many ways to estimate an investor’s potential investment in a stock, including analyzing how much they tend to invest in companies of similar size and how much capital it would take to become a top holder relative to companies of similar size. Ownership of industry peers is not a good gauge of potential; one reason is that investors rotate among industries and sectors, so being underweight at a given time does not preclude investors from turning favorable and investing much more in the near future. The key is to distinguish between fit and impact: to estimate impact, one should assume that fit or likelihood/probability of interest exists.

The combination of fit and impact determines whether an investor is likely to be attracted to the stock and how much they potentially can invest. However, not all demand for shares is good. While this may be counterintuitive, it is the case because investors can also sell and short-sell shares. Therefore, investors that tend to hold shares for only a short period of time and large short-sellers generally should be avoided since their demand may end up having an adverse effect on volatility and valuation. In fact, Thomson Financial’s empirical research indicates that companies that attract investors with long-term investment horizons trade at higher valuation. Figure 2 shows that companies with lower average shareholder turnover receive higher multiples given their projected long-term EPS growth and total return (projected EPS growth plus dividend yield).

Figure 2: Shareholder Turnover and Valuation

Knowing the Customer

An important starting point is to understand the reasons why current shareholders are invested in the stock. This knowledge is important in order to anticipate how shareholders might react to changes in the company’s investment profile, and which shareholders are more at-risk — possible sellers — than others. The other important constituents who should be understood are prospective shareholders — small holders and nonholders who have good fit, impact, and quality to justify investing time and effort in courting them.

The main sources of knowledge about institutional investors are what they say (qualitative information), what they do (quantitative information), and how they act when they meet and invest with companies (experience). Companies should use a combination of these three sources. Relying on only one or two sources is not ideal and could be misleading, as investors’ claims are not accurate sometimes for reasons that include subjective and relative comparisons. For example, many investors claim to be long-term investors but are not, either because their definition of long-term is subjective (a four-week holding period is long-term for some) or because their holding period is long relative to some investors but short relative to others.

Quantitative data, when available, is harder to dispute and should be the first source of information to analyze investors — what they hold, buy, and sell and with what frequency and magnitude. The goal is to determine what drives investors’ investment decisions, which may be achieved by analyzing investors’ portfolio breakdowns on relevant financial and market factors that gauge investors’ sensitivity to valuation, growth, income, and leverage. This should be done to the mutual-fund level where investment disciplines are more defined and easier to discern.

However, quantitative analysis does not fully capture investors’ decision-making process because active buy-side investors do not follow a pure quantitative approach. There is additional information to be gained from what investors publicly disclose about their investment preferences; what they disclose in direct communication with companies; and what they willingly disclose to third parties such as investor relations advisory firms. These sources provide a wealth of information that should not be ignored.

This qualitative and experience-based information is even more essential when targeting non-U.S. investors since their disclosure of portfolio holdings is limited and less timely. This is primarily due to the general lack of regulation similar to the Securities and Exchange Commission’s 13-F filing requirements. As a result, qualitative information becomes even more critical when analyzing and targeting non-U.S. investors due to the partial and incomplete quantitative data.

Figure 3: European Investments in U.S. Equities — Top 10 Financial Centers

Reaching the Customer

The next step is to engage in the marketing effort with appropriate shareholders and prospects. The keys to reaching investors are: 1) plan, and 2) execute. The marketing plan should draw on the first three steps: developing the investment story, defining the target audience, and understanding investors. Investors should be prioritized: large shareholders and targets with high fit, impact, and quality should take first priority when it comes to investing time and resources.

The company should plan its marketing activities based on its resources and the number and priority of holders and targets in different geographical locations. It is essential for the management team to be involved in and supportive of the marketing effort. For most active, long-term investors, one-on-one meetings with management are a crucial step in the decision-making process. Such investors will naturally have prolonged exposure to the valuation of the equities they invest in, and consequently tend to do extensive due diligence before (and after) investing. The value that investors place on the equity depends on their assessment of the company’s ability to deliver in the future, and such an assessment is influenced by their view of the management team and its credibility.

Additionally, the company should maintain direct contact with its shareholders and target investors. This contact can take the form of one-on-one or group meetings, phone conversations, email communication, etc. Regardless of the format and forum, communication should minimize the use of intermediaries such as sell-side analysts and other third parties. Companies should still leverage sell-side conferences and relationships to increase visibility among investors or for logistical support during road shows. Nevertheless, companies should ultimately have direct control of the relationship with key investors. The role of the sell-side has been diminishing over the last decade, a trend exacerbated by the recent spate of high-profile conflict-of-interest cases on Wall Street. While still relying on the sell-side as one of the conduits of information about companies, the majority of buy-side investors now conduct a lot of research internally and prefer to deal directly with companies.

In terms of geography, companies should target investors with the capital that matches the company’s profile regardless of where these investors are located (unless cost or logistically prohibitive). Clearly, certain financial centers like New York, Boston, and London have an immense concentration of capital that necessitates visiting those cities. However, companies should not limit their efforts to the major financial centers.

Refining the Strategy

The final element of the investor marketing strategy is to continue to refine and update. No marketing strategy is static, and this holds true for investor targeting. The strategy should be revised to incorporate changes in the stock price and trading characteristics, changes in investor sentiment and investment approach, changes in market conditions, and direct feedback from investors. Even if the company and its stock do not change significantly over time, investors and the market are in constant flux.

This does not imply that the strategy should be overhauled frequently. Continuity is important, and certain aspects will not change dramatically since the focus is geared toward long-term investors who do not drastically change their preferences over short periods of time. Nevertheless, companies should always reassess and refine their marketing strategies according to company-specific and market developments.

Conclusion

Companies should apply traditional marketing principles to investor targeting: position the shares according to the investment story and characteristics; define the most appropriate audience of current and prospective shareholders; get to know the audience and what drives its investment decisions; develop and execute a plan to reach the target investors; and refine the plan as the stock and market conditions evolve. Applying these principles will maximize the chances of success in attracting quality investors, ensuring that management time and resources are invested prudently and effectively, and will ultimately have a positive impact on shareholder value.