The Buy Side

The Buy Side

1. The buy side refers to institutional investors, such as pension funds, mutual funds and insurance companies

   • These entities have enormous cash reserves available for investment and so can be considered the heavyweight investors in the investment community
     • The investor relations department may or may not want to pursue investments by this group, since their buying and selling activities are so large that they can roil stock prices, and also effectively reduce the amount of tradable stock

2. Institutional investors are always looking for profitable new investments in which they can generate a return on their cash, and so are continually being pursued by public companies

   • Their sheer heft makes them unlikely investors in micro cap and smaller businesses, since there are not enough available shares for them to move easily in and out of ownership positions
     • Most institutional investors have adopted internal investment rules that constrain them from buying the stocks of smaller companies
       • Most investors relations officers are willing to put up with this inconvenience for two reasons
         • Stock placements
         • Stock transfers
         • There are also several risks associated with institutional investors
           • Stock price
           • Votes
           • Its difficult to determine whether institutional investors as a group ten to be longer-term or shorter-term investors
             • Its obviously preferable from a public companys perspective for an institutional investor to retain its stock position for as long as possible, if only to avoid any downward pressure on the stock price
               • The investor relations officer may decide to pursue institutional investors, with the objective of increasing the proportion of shares held by this type of investors
                 • Investment decisions within institutional investment firms are usually made by a small number of fund managers
                   • These managers typically rely upon the advice of their own in-house analysts, or the reports of one or more outside analysts to make investment decisions

3. The buy side analyst is employed by fund managers to conduct research into specific investment opportunities

   • The reports created by a buy side analyst are only used by the employing fund manager in making investment decisions
     • Buy side analysts hope to achieve a research edge over other investors

4. A hedge fund is essentially a mutual fund for wealthy investors

   • Hedge funds are aggressively managed, and use a variety of strategies to maximize returns for investors

5. A sovereign wealth fun manages large amounts of cash from national goverments

   • Abu Dhabi Investment Authority
   • China Investment Corporation
   • Kuwait Investment Authority
   • Qatar Investment Authority
   • Temasek Holdings

6. Investors may buy shares directly, or through a stockbroker

   • The objectives of this large group of investors can be difficult to ascertain, so you will find that a small number of individual investors move in and out of the stock with great rapidity, while a larger number tend to hold onto their shares for long periods of time
     • A micro cap and nano cap firm will have an especially difficult time attracting individual investors

7. The foreign investor is a strong tendency for companies to only sell to investors located in their headquarters country

   • Which artificially narrows the field of potential investors
     • Multi-language version of website
     • Investor days at subsidiaries
     • International road show

8. An Investment club is a group of individual investors that votes to buy or sell investments with their pooled funds

   • There is a multiplier effect when making a presentation to an investment club, since their pooled investments can represent a moderately significant purchase
     • Investments clubs tend to retain securities that they have acquired for a longer period of time than most other investors, so convincing them to invest can have a particulary long-term payoff