Inside Investor Relations – Volume 11: Why foreign investors are also important to small-mid cap and micro-cap stocks?
(Source: MarketingLand)
In our " Inside Investor Relations – Volume 2 – Getting to know institutional investors", we mentioned that 42% of the Taiwan stock market‘s’ transactions in 2019 came from institutional investors, and these institutional investors will continue to play an important role in the Taiwan stock market. If we take a closer look at the list of major institutional investors in Taiwan’s capital market, many will be surprised to find that that foreign Institutional Investors (FINI) account for the majority of the top 20 institutional investors, which shows that these foreign institutions are very influential in Taiwan capital market.
Often times companies may tend to think that foreign institutional investors only prefer to invest in large-cap companies. However, based on public record and our analysis show that foreign institutional investors also invest in all kinds of small-mid cap companies. In fact, the number of companies and value invested by foreign institutional investors have increased overtime.
Over the past decade, the impact of FINI on Taiwan stock market has become more and more significant.
Foreign institutional investors ownership in Taiwan’s stock market has continued to increase in the past decade. According to Taiwan Stock Exchange and Taipei Exchange, the FINI shareholding ratio in Taiwan’s capital market in early 2010 was only 29.5%, but it had grown by more than 10% to 39.6% by June 2020.
Based on our database and analysis, 70% of the top 20 investors (14/20) in Taiwan stock market are foreign institutional investors, excluding domestic cross-holding companies such as Chang Gung and Formosa Plastic Group.
Given foreign institutional investors’ significance in Taiwan stock market, you may wonder: "What companies do they invest in Taiwan?” Many would think that foreign institutional investors would only invest in large-cap companies like TSMC, but is this really the case?”
In addition to large cap companies, small-mid cap companies are also gaining attention from foreign institutional investors
We can divide all Taiwan’s listed companies into five categories by market cap: large-cap (market cap greater than US$10 billion), mid-cap (market cap between US$2-10 billion), small-cap (market cap between US$0.3 - 2 billion), micro-cap (market cap between US$50 million-300 million), and nano-cap(market cap less than US$50 million). In the past five years, the number of large-cap stocks have grown from 13 to 22, and their market share has risen from 36.7% to 48.9%. However, Taiwan’s capital market is still mainly composed of small-cap stocks. Compared to large-cap and mid-cap stocks, which is less than 100 in total, the number of small and micro stocks has reached 1,300.
With more foreign institutional investors seeking to outperform the market, investment flowing into small-mid cap stocks have become indispensable. If we take a closer look at the investment portfolio of Taiwan’s top 20 foreign institutional investors, we can see they are invested in a wide range of stocks apart from TSMC. On average, each of them has invested in nearly 300 listed companies in Taiwan with an investment amount of up to US$5 Billion dollars.
Take Vanguard Group, the second largest foreign institutional investors in Taiwan and a passive fund for example, of the 435 companies that it is invested, 283 are small-cap stocks.
Dimensional Fund Advisors, LP (US), a major passive fund has invested in 1/3 of micro-cap companies in Taiwan. Others such as The Vanguard Group has also invested in many Taiwanese micro-cap companies and its position has continued to increase in recent years.
It is foreseeable that foreign institutional investments in Taiwan stock market will continue to grow in the future, and that their investment into small-mid cap companies will continue to increase.
For investor relations officer (IRO) of small-mid cap companies, in addition to attract investment from foreign institutional investors, you must also pay attention to improving the company’s overall corporate governance. As many of the top foreign institutional investors are consist of passive funds, who evaluates companies more on their ESG efforts, will engage the companies and exert their influences through their votes in the annual shareholders meeting.
In our previous article " Inside Investor Relations – Volume 7– MiFID II and its impact", we mentioned that under MiFID II regulations, whether it is a research report or Corporate Access services such as participating in an investment forum meeting held by brokers, teleconference or a roadshow, institutions need to pay for the service. Due to the increase in costs, institutions have reduced their participation in investment forum meetings and company visits. This in turn has affected brokers’ willingness to spend resources on smaller companies, whether it is research coverage or corporate access activities. Thus, for investor relationship officer (IRO) of small-mid cap companies, it is expected that you will need to reach out to investors more proactively, and formulate a proper IR plan and strategy to increase the visibility of your company.
QIC has many years of experience in corporate access services. We plan, schedule and execute tailor-made roadshows and targeted investor events for high-quality corporate clients. Besides, QIC helps corporates formulate a set of investor relationship strategies, pairs up qualified investors with corporates, and assists companies and investors to achieve effective two-way communication, so as to achieve the purpose of enhancing shareholder value. QIC does not provide execution services and is thus considered MiFID II-exempt by institutional investors who welcome QIC’s services and access to senior management of quality companies. If you are interested in learning more about our services, you are welcome to contact us.
Contact Person: Yvonne Huang yvonnehuang@qtumic.com