Shareholder clienteles perhaps matter less if your stock is on a tear. Absent that, publicly listed companies would do well to court an anchor long term owner to partner with to stick to a strategy of patient investment.
The marketing folks spent an enormous amount of time crafting products for the right customer clientele. A lot of thought usually goes into thinking about the demographics of the customer (age, gender, marital status, occupation), their geographical location (US and Canada, EMEA or Europe, Middle East and Africa, Asia, or micro markets in the US) and other characteristics such as culture and language, their interests, behavior, and perceived status. One can segment customers along literally infinite dimensions.
This discussion had me thinking about whether CEOs and CFOs put in this much thought into cultivating shareholder clienteles. As an illustration, I thought I should go pull up some data on changes in shareholder segments over the last 10 years for one company as a case study: IBM. I picked IBM because it is often accused of missing at least three technology waves: mobile computing, cloud computing and AI. I wanted to check whether value or dividend yield focused investors pressured management to pay out dividends at the cost of long-term investments. IBM’s competitors such as Amazon and Microsoft have somehow avoided these arguably myopic pressures. Perhaps as a consequence, IBM’s stock returns have underperformed the S&P 500 and even a US treasury ETF over the last 10 years.
Let’s get to the data. As per S&P’s CAP IQ database, roughly 60% of IBM is owned by institutions with the remaining 40% held by the public, presumably individuals and unidentified others. Of the portion owned by institutions, CAP IQ states that 84% is held by what the database calls “traditional investment managers,” 8% is owned by banks/investment banks, 3% by government pension sponsors and 2% by hedge fund managers.
I pulled out data for the top owners of IBM over the last 10 years (March 2014 compared with December 2023) to check whether there is a steady clientele of shareholders interested in owning the stock. I picked 10 years to represent a potential cycle where investments begin to fetch returns. Perhaps that is too long but it’s a reasonable starting point. Here is what I found:
In the table above, ownership refers to the latest available data on how much of IBM is currently owned by these investors. The column 2023 over 2014 simply divides the proportion of stock owned by the investor in December 2023 by that owned in March 2014. This column suggests that Vanguard and BlackRock have increased their ownership over the last decade by 46-50% even as IBM’s stock has tanked.
If I were the CFO of IBM, who can I chat with to discuss long term strategy assuming that they will stay with me as a shareholder for a long horizon? And I was left scratching my head for good answers.
The three biggest owners are BlackRock, Vanguard, and State Street, collectively accounting for 23.2% of the company. Why? Because IBM is a part of several indexes and the Big Three, by and large, hold indexed investments. Does the Big Three have the time, bandwidth, interest, and the legal clearance to engage in deep discussions with IBM over long term strategy? Most probably not, as alluded to by my joint work on the Big Three’s engagement record.
What should one make of the remaining investors? Perhaps the state pension funds, Calpers and Norges, can be useful long-term partners? What should one make of the several banks that own stock in IBM? Are they being held in the “street name” for someone else? Do these banks have any interest in engaging with IBM over strategy?
What about the asset managers in the list? Many, if not most, sell mutual funds of every conceivable, often contradictory, style such as value, growth, quality, and the like. They are, in effect, a supermarket of several investing styles and arguably do not have a particular view over how IBM should be run.
Where does this leave the CFO and the Investor Relations arm of IBM?
· For sure, there is a lot of churn among positions and owners over the last 10 years. The pressure to cater to these transient investors to get through a quarter or two must surely be intense.
· Why do CFOs worry so much about doing well in quarterly earnings conference calls, apart from of course their inherent competitive instinct to do well at whatever they do and the short term nature of most executive compensation? Surely analysts are not investors!
· The other day, a senior CFO shared the following amusing but disturbing anecdote: “XX firm, a very prominent mutual fund shop, without blinking an eyelid tells us, “We are long term investors. Our holding period is 18 months!” Meetings with this mutual fund shop in New York represents a peanut gallery of 18 odd fund managers of individual funds, probing the CFO for cues on whether they should actually hold the stock for 18 months.” How is this interaction useful to the company for generating long term value?
· Analysts tend to ask for quarterly earnings guidance. Could companies with stable long-term owners arguably pay less attention to guidance and more to their long-term investment plans? Berkshire Hathaway does not give earnings guidance, for example.
· What pressure does the retail investor exert on IBM? Not a lot except perhaps a desire for good dividend yields? How has that changed with rising interest rates?
· What, if anything, can IBM do to seek out a different investor clientele? Would an anchor owner who can partner with IBM with patient capital lay the foundation for rapid growth?
I have often said in my classes that we almost need a new investor class: public private equity. By that I mean, someone who is willing to hold under-performing public companies for a long time (7-10 years) and is willing to work with management to release hidden value in the under-performer.
When I put this to a few CFOs and board members, they generally said that finding the right clientele is just very hard. The recommendation is that a firm like IBM needs to articulate a clear strategy, preferably one that targets growth. And then the firm needs to provide proof points of success, repeatedly. Eventually, over time, which may mean five years, the “right” clientele, will come along.
Success brings in momentum investors or even growth investors who may stay with you till you keep growing. Once growth stalls or if the prospects of growth stalls, momentum and growth investors leave. Even a self-professed value investor such as Warren Buffett, famously held IBM for seven years, and gave up in 2018-19 to pick up Apple. Buffett arguably got fed up with the lack of a coherent strategy to turn IBM around.
Some of this sounds circular. Value investors in my stock will not let me set aside significant capital for risky investments to eventually grow as they want to be paid dividends and share buybacks. Perhaps the trick is to somehow shed the value guys by grabbing the initiative and moving ahead with a growth plan. The value folks may sell in the short run leading to a short term fall in the stock price. But, a short term hit may be better than long term stasis.
Assuming a firm has a reasonable strategy, perhaps another tactic may be to seek out an anchor owner who will serve the role of the public private equity firm. As an example, Bill Gates’ fund, Cascade Investment LLC, is the largest non-index owner of John Deere (7% owner). Cascade has held concentrated stakes in Republic Services, Ecolab, and Auto Nation for years. Indeed, research by my colleague, Kalash Jain at Columbia, suggests that stocks held by the same non-index investor for a long duration outperform the market.
Is it time for the CFO and the IR folks to think harder about finding the right shareholder clientele and hopefully escape the grind of transient investors and performative quarterly conference calls? Of course, the best place to start is to come up with a credible growth strategy and deliver results.