What do institutional investors want – what do perception studies tell us?

Qualitative investor perception studies give insight into the minds of shareholders. They allow companies to get an impartial comprehensive assessment of their standing in the investor community while also being a tool for continuous improvement for investor relations.

We recently collated the studies undertaken over the last 24 months to decipher the key insights across a number of topics. Interestingly three themes emerge that we have called ‘key investor wants’.

The three themes are consistency, long term focus on return on capital and capital allocation discipline.

Institutional investors tell us they value consistency across a number of aspects within the company. To start with the obvious, investors like companies that consistently meet or exceed guidance. Another area where consistency is sought is in financial performance. This has its roots in corporate finance as companies with less volatile cash flows, all else being equal, will have a lower cost of capital and trade on higher multiples.

The third area that consistency is valued is in the area of strategy. Certainly strategy is not static and should evolve over time, but at a high level, well executed strategies that are also consistently described and presented to investors is another investment positive.

Large institutional investors also want companies to focus on the long term, especially in the context of the return on capital. Investors are very aware of the trade-off between growth and the return on capital and often see growth as dilutive of returns. The concern of “growth for growth’s sake” is understandable when considered with the often held view that the Australian economy and stockmarket is stable but low growth.

We have had considerable debate whether investors are truly long term, however in our studies we are typically interviewing larger institutions that own significant stock in the company and often have a core holding.

The final of the three themes is the desire for management teams, and their boards, to be disciplined around capital allocation decisions. When put in the context of the previous theme, investors are focused on the returns generated by investment, be it capital expenditure or M&A. However the theme of capital allocation discipline extends beyond investment decisions and includes how cash flows are returned to shareholders, via dividends and/or buybacks, and the appropriate capital structure.

By conducting a qualitative investor perception study not only is a management team and board, able to obtain how their key investors judge their consistency, long term focus and capital allocation discipline but more importantly investors will give deep insight into their thoughts on these topics and other areas where their views are sought. It is this wealth of views, as compared to just a rank or score that allows the company to better understand their investors’ judgements.

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