Wednesday, 5 December 2012

How to calculate retail versus institutional shareholders

I recently did a post on Woolworth's and the attempt of an activist group of shareholders to change the companies constitution.  Part of my analysis after the failure of this vote was an evaluation of how retail versus institutional shareholders voted.  This post will cover how you can calculate what percentage of the register is institutions versus what percentage is retail.

Why is being able to calculate type of shareholders useful?

I think there is a value in knowing what sort of shareholders form the shareholder base as an investor.  Although you shouldn't put too much weight on this issue it does give you some sort of indication about how the share price moves and how reactive it is to negative sentiment:

  1. Retail shareholders want different things
    • In the current market environment retail shareholders tend to be very yield focussed at the expense of all other characteristics - in other markets the focus is on growth or on technology.  With this focus on yield some stocks will trade well above their fundamental valuations if they have a strong yield and a strong retail shareholder following
  2. Retail shareholders often tend to react more to 'noise'
    • Although this is a generalisation - retail shareholders (more so than institutions) tend to react to noise and negative sentiment.  This is because institutions typically have to be close to fully invested in something while retail shareholders are able to sit in cash
    • Companies with large retail shareholder bases can have much more volatile share prices as they fall in and out of favour with retail shareholders
  3. Retail shareholders are more loyal to companies 'they know'
    • Retail shareholders tend to like companies they truly understand (which is definitely a good thing), however what it means is that the valuation of these companies may not fall to a point where it looks like particularly compelling value
  4. Institutional shareholders are more vocal and keep companies 'in line'
    • Although this is a gross exaggeration, institutions do tend to make their voices heard and companies with large institutional shareholders tend to listen to those shareholders
    • For this reason institutions often avoid (or allocate a discount to) companies controlled by one person or a family (like News Corp and the Murdochs)
There are many more traits like the ones I've mentioned above and there is no clear way you can benefit from the knowledge - however it will often explain why companies take certain actions or the stock price responds in a certain way.  It adds another lens for you to understand your investments and it is so easy to do that you can calculate it in under 5 minutes on your own.

How do you calculate what percentage of shareholders are retail versus institutional?

Note that this example below is for Australian companies.  I'm not exactly sure how to calculate it for international companies but there is normally a way to do this from the information provided year to year.  I will try and look into this for future posts.

I am using Woolworths as an example.  Part of the Annual Report (and sometimes for the interim reports) will always be dedicated to a summary of the shareholders section.  For Woolworths I have linked to it here.   What you need then is a couple of pieces of information and assumptions
  • You need the current price of the stock (approximate will do).  As at the date of writing this post WOW share price was ~A$30 per share.
  • You then need to make an assumption around the maximum value of shares that a retail shareholder is likely to hold.  I normally assume this is ~$100,000.  Retail shareholders are unlikely to hold more than that in a single company
Then you need to look at the ranges of fully paid shareholders.  Woolworths breaks theirs up in the following categories
  • 1 - 1,000
  • 1,000 - 5,000
  • 5,000 - 10,000
  • 10,000 - 100,000
  • 100,000 and over
Then assign assumed value ranges to these categories which then makes it
  • $30 - $30,000
  • $30,000 - $150,000
  • $150,00 - $300,000
  • $300,000 - $3,000,000
  • $3,000,000 and over
Retail shareholders therefore are going to fall within the first two categories only.  I am going to make a simplifying assumption and say that all the people in the first category are retail shareholders.  

I then take the number of shares within these categories (103,294,619+273,371,259) and divide it by the total shares outstanding (1,234,216,128) to get the percentage of shareholders which are retail.  For Woolworths this comes to 30.5%.

It is very simple to do and can give you an insight into any company you invest in.

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