The LTSE Long-Term Score℠: An investor alignment tool
As a leader of a public company, you face a number of challenges today. These include not only macroeconomic factors like high inflation and rising interest rates, but also increased stock market volatility and market pressures that force short-term decision making. This can prevent you from implementing a long-term strategy to achieve your business goals.
One way you can overcome these challenges is to align your business with higher-quality, long-term investors. Research performed by LTSE Services (LTSE), which is an affiliate of the Long-Term Stock Exchange (Exchange), shows that companies with high shareholder quality may enjoy increased market value and lower volatility.1 This can help you drive your company’s long-term focus.
A technology software company’s actively managed long-term investor quality has increased by 68% as measured by its LTSE Long-Term Score℠.
How the LTSE Long-Term Score℠ analyzes long-term investor behavior
LTSE built a proprietary algorithm that calculates the LTSE Long-Term Score℠ , measuring portfolio manager investing behavior. The LTSE Long-Term Score℠ is the only diagnostic in the industry that analyzes long-term investor behavior at the individual-fund level.
The LTSE Long-Term Score℠ is an indicator of the actual investing behavior of a specific fund manager. Based on the last five years of reported holdings, it indicates how long the fund holds investments. The higher the score, the more patient an investor is as a company executes its long-term strategy, and the better aligned the fund is with the company.
A higher LTSE Long-Term Score℠ and better alignment correlate to lower volatility, which optimizes market conditions and may lead to higher stock price returns over time. It also provides a company with the ability to identify and access capital from long-term shareholders so it can focus on executing its long-term strategy.
The LTSE Long-Term Score℠ analyzes how long investors hold stocks across the company’s sector and across a group of specific competitors that the company defines. This information can be leveraged by your company’s Investor Relations team to determine how to target and how to position your company specifically to each portfolio manager and analyst when doing investor mapping and meetings.
How the Long-Term Score℠ analyzes shareholder quality and performance
During the Great Recession, to which the current capital markets dislocation bears some resemblance, research conducted by LTSE Services shows that public companies with high levels of shareholder quality generated 95% more market value during the subsequent recovery when compared to their peers.2
LTSE used the proprietary LTSE Long-Term Score℠ to analyze shareholder quality and performance across 40 technology companies in the S&P 400 Index. According to this analysis, companies with an LTSE Long-Term Score℠ in the top quartile generated approximately two times greater market value for investors as they emerged from the Great Recession, compared to companies with an LTSE Long-Term Score℠ in the bottom quartile.3
Emerging from the 2008 financial crisis, companies in the top quartile in LTSE Long-Term Score℠ (or those with the highest investor quality) grew their market value by $1 billion, while companies with an LTSE Long-Term Score℠ in the bottom quartile (or those with the lowest investor quality) grew their market value by just $500 million. This dynamic will likely persist as we emerge from the current market dislocation.
In a separate study, across 90 growth companies in the S&P 400 Midcap Index, companies with the highest LTSE Long-Term Score℠ experienced up to 30% lower trading volatility and up to 50% lower short-term interest.4
Why the LTSE Long-Term Score℠ is a better barometer of investor alignment
The proprietary LTSE Long-Term Score℠ is a measure of how long-term an investor behaves based on actual market behavior. The LTSE Long-Term Score℠ was specifically designed to support long-term companies, whereas turnover ratio, which is the most common metric used by companies, was primarily designed to support retail investors.
The LTSE Long-Term Score℠ serves as a better barometer of an investor’s alignment to your vision and mission than turnover ratio and investment style. This empowers you to align with investors who are long-term focused, helping you reduce the volatility short-term investors often create.
Investors are graded on a scale from 0 to 100 based on how long they hold their portfolio companies beyond five years.
There are three levels of LTSE Long-Term Score℠:
- The Overall LTSE Long-Term Score℠, which is based on the investor’s total holdings.
- The Comparable Group LTSE Long-Term Score℠, which is based on investors’ ownership of a specific comp group.
- The Company LTSE Long-Term Score℠, which is based on investors’ ownership of a specific company stock.
Benefits of improved investor alignment
The following examples demonstrate how LTSE-listed companies benefit by focusing on investor alignment. In these instances, the LTSE Long-Term Score℠ was used alongside expert consulting, drawing on the experience and insights of our investment alignment team.
• Since listing with LTSE, a software company’s actively managed long-term investor quality has increased by 68% as measured by its LTSE Long-Term Score℠. This is especially significant given the backdrop of a dislocated and highly volatile market.
• An LTSE-listed communications software company captured approximately 31% of its potential sustainability capital opportunity using an investor engagement strategy based on financial and sustainability factors. Targeted investors purchased $368 million of the company’s stock, even as the overall market was trading down significantly.
Public companies may reap numerous benefits by aligning with higher-quality, long-term investors, including a higher stock price and lower market volatility.
To learn more about investor alignment strategies and how using the LTSE Long-Term Score℠ could benefit your company, please contact the LTSE Listings Team.
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References:
1 LTSE Services, “Shrinking the Volatility Gap”, 2021; Proprietary Research, 2022.
2 LTSE Services, Proprietary Research, 2022. The Great Recession period was operationalized from 2009 - 2011. Investor quality was anchored to Q1 2009, and we compared how much investor value the top and bottom quartiles companies in Long-Term Score℠ generated between Q1 2009 and Q1 2011.
3 LTSE Services, Proprietary Research, 2022.
4 LTSE Services, “Shrinking the Volatility Gap”, 2021.
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