Despite Outflows, the Importance of International Investors Grows.

Transcription

1 Despite Outflows, the Importance of International Investors Grows

2 Given the sheer size and depth of the institutional investment community, the size of the U.S. capital markets, and the prevalence of the S&P 500 as a key performance benchmark, it shouldn t come as a surprise that U.S. institutions have dominated (and still dominate) the ownership profile of U.S. companies. About 12 years ago we began seeing an uptick in questions from our U.S. clients about their international (ex-us) shareholder base. Until then, for all but a pioneering few, international outreach typically meant visits to neighbors to the north and an occasional widening-of-scope at an international industry conference to meet investors one-on-one in that city. One might posit the chicken-or-the-egg argumentwhether the increase in outreach in these past ten years was spurred by the increase in international investment, or vice versa. Either way, the continued growth in both the proportion of international shareholding and the number of Ipreo U.S. issuer clients with a structured approach to international outreach is striking. 1

3 Between 2005 and 2015, the median proportion of international investment in S&P 500 stocks more than doubled, from 7.0% of the total institutional shareholding to 14.7%. At the end of 2016 the number has risen to 15.5%. Interestingly, S&P issuers experienced $23B in net outflows from international investors in The explanation for this seemingly contradictory pieces of data is found in the fact that significantly more issuers saw their shares outstanding decrease (mostly as a result of share buy-backs), than increase, in Proportionally speaking, buy-backs have resulted in a sharper decrease in the U.S. investor base over the foreign. Ipreo s bespoke identification exercises for U.S. clients show that the proportion of international shareholding is about 25% higher when accounting for non-filers as well as incomplete and outdated filings. Adding 25% to that median 15.5% figure puts the actual median international shareholding of S&P 500 stocks above 19% of the total institutional shareholder base. % of Total Institutional Ownership 18.00% 16.00% 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% Source: Ipreo EXHIBIT 1: MEDIAN INTERNATIONAL (EX-U.S.) SHAREHOLDING IN S&P 500 HISTORICAL LEVELS 7.0% 14.7% % 2

4 Mega-caps retain 16.0% of total institutional shareholding in international hands on average, marginally higher than what we see for large-caps (15.2%) and mid-caps (15.4%). The expansion of the proportion of international shareholding in 2016 has permeated issuers of all sizes as Exhibit 2 shows. Indeed, this has been the trend going back to EXHIBIT 2: MEDIAN INTERNATIONAL (EX-U.S.) SHAREHOLDING IN S&P 500 BY MARKET-CAP 16.5% 16.0% 16.0% % of Total Institutional Ownership 15.5% 15.0% 14.0% 15.5% 15.2% 15.4% 14.4% % MEGA LARGE MID Source: Ipreo 3

5 INTERNATIONAL INVESTMENTS IN TECHNOLOGY STOCKS GAIN GROUND IN 2016 Technology issuers saw a sizeable gain in the proportion of international ownership in their shareholder base, pushing them to an overweight status at 22.5% of all international investments in the S&P 500. The sector also bucked the aforementioned trend of net outflows by international investors and registered a net inflow of $2.3B. Based on our previously cited view that publicly disclosed ownership understates the actual shareholding by 25%, we estimate that the median tech stock in the S&P 500 has between 20%-21% of its institutional ownership in international hands. Defensive sectors saw mixed results with Healthcare seeing outflows and Utilities experiencing inflows. In our consulting experience, even mid-cap regional utilities with zero revenue exposure outside of the company s home state garner interest from international investors. The secret? Dividend yield and regulated protection of the businesses- a combination that is attractive to conservative yield seekers like pension funds. EXHIBIT 3: % OF VALUE HELD BY INTERNATIONAL SHAREHOLDERS IN S&P 500 STOCKS SECTOR Basic Materials Consumer Goods Consumer Services Energy Financials Healthcare Industrials Technology Utilities S&P Weighting % 9.4% 6.6% 17.8% 14.1% 10.2% 21.5% 3.1% 2.3% 9.9% 14.2% 6.2% 19.0% 8.0% 22.5% 3.4% 2.0% 10.3% 15.2% 5.2% 19.6% 16.0% 7.7% 21.1% 2.8% 3.1% 9.1% 12.9% 9.0% 19.4% 14.4% 9.7% 19.5% 2.9% 4

6 AMERICA STANDS ALONE A striking feature of international shareholding in S&P 500 stocks is the proportion that is actively managed. Almost 85% of the total international equity investment was held by active managers, which stands in contrast to the gains made by passive investors globally. Authors: Sudarshan Setlur and Matt Davis Sudarshan Setlur is a Director of the Global Markets Intelligence team Matt Davis is a Lead Analyst in the Corporate Analytics team 5 A part of the explanation for this is that ETFs are much more common in the U.S. compared to the rest of the world. Additionally, some of the largest active international managers, such as Norges Bank, run portfolios in which final investments are heavily determined by top-down allocations. But we find that most investors run relatively concentrated portfolios. 70% of the international investors in this study own 50 or fewer S&P 500 stocks. Driving these active managers is the lack of comparable opportunities. There is simply no other country that offers as many well-run companies with excellent trading liquidity across sectors in a transparent, well-governed economy. This feature of American capitalism has proven to be immune, thus far, to the vagaries of Washington politics. As you set out on your quest to grow the international ownership in your stock, it s important that you set achievable goals. Eschew unrealistic or even spurious goals such as matching your international investment levels with the proportion of revenues earned overseas. Instead, choose goals based on relevant data like the current make-up of you and your peers shareholder bases, investment trends, and capital flows into and out of U.S. equities.