ARE U.S. BANKS PREPARED FOR RUSSELL 2000 INDEX REMOVAL IN 2023?
The annual rebalancing of the Russell indices is fast approaching and remains a crucial part of ensuring that they accurately reflect the current state of the equity market and its segments. The Russell 3000E Index, which is comprised of the 4,000 largest publicly traded U.S. companies, is maintained by FTSE Russell. Despite the confusing naming structure, the Russell indices are arguably the world’s best-known benchmarks for micro- and small-cap stocks.
The process began with the “Rank Day” on April 28th, when index membership eligibility for the 2023 Russell Reconstitution is determined from constituent market capitalization at market close. On May 19th, the preliminary reconstitution portfolio is communicated to the marketplace, and updates are provided throughout the month. The newly reconstituted indexes then take effect after the close on June 23rd.
With many community and regional publicly traded banks expected to be removed from the Russell 2000 Index this June, senior management teams at potentially impacted companies should anticipate the impact on trading in their stocks, be prepared to educate their boards on the process, and take a proactive approach to their investor relations efforts in May.
Preparation for Removal
Publicly traded banks and financial institutions should think carefully about how they can rely on their investor relations teams to prepare for the eventualities of the Russell rebalancing process. These teams can help to ensure that their clients are aware of the upcoming changes and the steps needed to mitigate any risks.
Increase Investment Community Interactions
While reconstitution is largely thought of as an event dominated by ETFs and other passive investors, because stocks moving on or off the Russell indexes can expect to see a significant jump in volume, active managers employing fundamental strategies have the opportunity to buy and sell relatively thinly traded micro- and small-cap stocks while minimizing their trading costs.
As you await a pending removal from the Russell 2000, now is not the time to diminish your engagement with institutional investors and sell-side analysts. In addition to maximizing productive virtual and in-person meeting opportunities, senior management teams should use the months of May and June to cultivate relationships with each of their actively managed institutional shareholders and equity research analysts, as well as their top prospective shareholders and research analysts.
For banks that don’t have those direct relationships, now is the time to step up efforts to engage with and ensure your audience understands the bank’s investment thesis and disclosed expectations for 2023, as well as the quality and depth of the management team.
Increasing your proactive outreach and engagement with the investment community, with particular emphasis on value-oriented strategies, should also be a focus this month now that the vast majority of community and regional banks have reported first quarter 2023 results.
Refine Your Messaging
While the reporting of first quarter 2023 financial results was a critical step before the reconstitution process, senior management teams now need to assess how effective their messaging was while bridging any gaps in understanding. To ensure your investor narrative is resonating with analysts and investors, executives should take a step back and gain a deeper understanding of Wall Street’s perception to improve materials and messaging. One way to do this is by interviewing current and past portfolio managers and research analysts. This perception study can provide a roadmap for growing the shareholder base long after the Russell reconstitution while also acting as an excellent customer service exercise, affirming the value your company places on the investment community.
Leveraging the content of your perception study interviews can yield a statistical snapshot of target areas of concern to investors that may be used to prioritize outreach efforts ahead of the rebalance. This perception study can also provide a detailed summary of the most relevant and insightful comments received from investors, as well as specific strategic recommendations for the company based on the insights gained from investors.
Recognize the Influence of Passive Money
The rise of passive investing is well documented, representing about half of U.S. equity assets under management in open-ended mutual funds and ETFs. Just as importantly, active or fundamental investing strategies now account for a small portion of total daily trading volume in equities. The balance is largely attributed to ETFs and other passive strategies, high-frequency trading and derivatives.
As a result, it’s important for bank executives not to overestimate the influence of a single news event or material disclosure on a given day’s share price. This is even more important when trying to determine the timing of material announcements and gauge “what the market thinks” about disclosure during the noise and volume resulting from the Russell rebalancing process.
In summary, the annual rebalancing of the Russell indices is a critical event for the U.S. equity market. Community and regional publicly traded banks should prepare for the event, relying on investor relations teams to provide guidance on potential risks and opportunities. By understanding the significance of the process and staying informed of updates, management teams and Boards can make informed decisions and navigate the changes with confidence.