A professional investor is usually the manager of a fund, such as a pension fund or mutual fund, and is commonly described as an institutional investor. An analyst working for or serving the needs of a fund is considered a buy-side analyst.
Before contacting institutional investors about buying company stock, the investor relations officer (IRO) must first determine their investment strategies to see if the company meets their criteria. For example, about 30% of all institutional stock portfolios invest in stock indexes, where the amount and mix of shares held are automatically determined by the index. If a company is listed on an index, then institutional investors will buy it. If not, then they have no interest.
Also, institutional investors do not usually invest in micro-cap companies, because their stock is so thinly traded. When there is minimal trading, a fund manager will have great difficulty acquiring a large volume of shares, and similarly will have difficulty later in selling those shares without initiating a stock price decline. Also, if a company’s stock is not listed on an exchange, then a fund manager will not consider it to be a viable investment. In these situations, the IRO should not expend any effort to contact institutional investors, because they will not purchase company stock under any circumstances.
The discussion thus far has been on those institutions not to pursue for an investment. Conversely, there are several ways to locate those funds that would be acceptable investors. First, contact an investor relations consultant who has contacts among the fund managers, and who knows the preferred investment types of those managers. Also, review the websites maintained by the various funds, where they frequently outline their investment strategies. In addition, continually review the industry news to see who is quoted in feature articles. In many cases, a company manager will discuss how the company grew following an investment by a specific institution.
Another option is to look for institutions that invest in peer companies having similar investment characteristics, such as being in the same industry, or having a similar growth rate in revenue, profits, or cash flow. It is also possible that these peer companies may not be in the same industry. Once this peer group is established, comb the institution web sites to determine which ones are investing in the peer group. Then contact their investment managers to point out the similarities between the company and the companies in which they currently invest, and to ask for a familiarization meeting.
Whichever search method is used, the key point is to target fund managers, investment advisors, or buy-side analysts who either invest or recommend investments based on general guidelines within which they can choose the stocks of individual companies. If these people are locked into only very specific investments by their fund investment policies, then there is no point in contacting them.
If institutional investors are interested in investing in a company, one of their first actions is to delve into what is said in an analyst’s report about that company, without paying much attention to the actual rating given. Consequently, be thoroughly familiar with the contents of analyst reports, and be prepared to answer questions from institutional investors who are equally familiar with the same reports.
The IRO needs to understand how institutional investors expect to be treated. First, they expect a tailored one-on-one meeting, where management makes a private presentation to them, and sets aside sufficient time to answer all of their questions. Second, they will expect management to conduct a quarterly conference call, so that they can receive the latest information about the company’s operational and financial results, and have an opportunity to pose questions to management. Third, do not bury them with annual reports and promotional materials, since they are already wading through enormous amounts of material sent to them by other companies. Instead, prepare a summarized version of key information from public filings, and send it to them in the format they prefer. This may seem like a great deal of work, but retaining an institutional investor is important, so paying special attention to their needs is appreciated.
Though most IRO’s would love to have a few prominent funds invest in their company’s stock, be aware that there are repercussions to having such investors. The main problem is that they accumulate so many shares that the trading environment becomes illiquid, with few remaining shares available for trading. Also, when institutions sell their stock holdings, the volumes sold are so large that there is a significant chance of a stock price decline.