As Mutual Funds Experience Outflows, Can Retail Investors Fill the Void?
May 20, 2022
Retail investors, whether through mutual fund holdings or individual bond portfolios, are the largest holders of municipal bonds. While mutual funds often drive primary market demand in our market, individual holdings from Separately Managed Accounts (SMAs) or retail buyers can both boost demand for your deals and increase the diversity of your holders.
Investors withdrew $5.53 billion from municipal bond mutual funds in the week ended April 20, according to the Investment Company Institute (ICI). The prior week saw outflows of $7.23 billion.
If successful, a retail-friendly marketing approach can help offset the diminished demand from institutional investors when fund outflows like these occur.
Utilizing a dedicated investor relations (IR) website, such as the ones used for decades by corporate issuers, can help issuers cost-effectively, and efficiently, engage retail investors ahead of their next sale. These are easy tools that any government should be using to boost their overall transparency.
By “engage”, I mean having a strong digital presence with an IR website that’s appealing to institutional and retail buyers, easily found via Google, and makes it easy for investors to be notified of future bond sales.
Capturing organic inbound interest and distributing outbound communications may be new concepts to many issuers, but they’re essential strategies in today’s digital age.
Issuers, both large and small, have found the value of using IR websites to market to retail investors ahead of a bond sale, and developed significant distribution lists of these buyers that can be used again and again for future bond sales.
Connecticut Green Bank does an exemplary job of appealing to retail investors.
We know anecdotally that retail likes to buy local, like investing in a project or in a community that they’re familiar with. They also tend to be so-called “buy-and-hold” buyers.
But these individual buyers have different levels of sophistication. Some retail buyers may not know how to place an order for your bonds. Even those who are capable of purchasing your bonds may miss the deal because of how quickly they come and go in a single morning.
As a result, issuers experience less demand and individuals are often left to the secondary market where they pay more for bonds than during its initial offering.
While it can take a lot of smaller orders to amount to the order size of a portfolio manager at a mutual fund, cultivation of retail over time can provide investor diversity and better pricing than when solely focused on institutional demand from funds.
A strong IR website that makes financial information easy to find and raises awareness ahead of your deals is crucial to build that diversity over time.
Below are a couple of best practices we’ve heard from our top issuer-clients who have successfully engaged retail investors for their bond sales. We encourage you to review with your Municipal Advisor and Bond Counsel to see if there is a fit for your bond program:
1. Announce your bond sale as early as possible by providing notice of the sale on the forward calendar on your IR website.
In other words, give individual investors as much time to consider the bond offering as possible.
2. Once a preliminary official statement is developed, post it at least two weeks before your bond sale on your IR website.
Two weeks is better than one week. Leveraging your free, open-access government or IR website enables you to raise awareness amongst both traditional and non-traditional investors.
3. Send out a press release to local media outlets who are more likely to pick up the news about your sale.
This can be coupled with any announcement of your bond ratings assigned to the deal. If you’re lucky enough to have one, don’t hesitate to work with your internal communications team to do this!
4. Take advantage of your social media presence. In addition to a traditional press release, announce your sale via social media.
Most governments have social media accounts with thousands or tens of thousands of followers. Not only is this being transparent, but it's casting a wider marketing net for potential non-traditional investors.
5. Digital investor roadshows can be very helpful to investors, including retail, and can be a central component of a retail marketing push.
Roadshows can be a tool to provide context behind the bond offering, and should be considered with the guidance of the Municipal Advisor and Bond Counsel.
6. Provide rating agency reports, which can be hard for retail to otherwise access.
Investors constantly ask to receive the same information that issuers provide to rating agencies so that they can make their own judgments.
7. Show where or how the bond proceeds are expected to be used.
If there are photos or other descriptions of the projects being funded, consider showing those on your IR website.
8. Provide information on your IR website on how individual investors may buy your bonds.
No issuer is a broker dealer, and thus bonds have to be purchased through the bank underwriting your sale. But providing contact information for the banks involved could be very helpful to investors unaccustomed to buying bonds in the primary market.
If you recognize the importance of retail buyers and make simple, incremental changes to appeal to them, we’re confident you’ll reap the benefits in the future.
Start considering these options today, speak with your finance team, and find out where you can begin.
CEO & Co-Founder @ BondLink