Dozens of U.S. Banks Must Prepare for Russell 2000 Index Removal in 2021
By Jeff Schoenborn, Managing Director
With dozens of publicly traded banks expected to be removed from the Russell 2000 Index in June 2021, executives 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 before and after reporting quarterly results in April.
High Market-Cap Hurdle in 2021
FTSE Russell “reconstitutes” its U.S. equity benchmarks annually, and market capitalization is a key factor determining whether a stock is added or removed from indexes including the Russell 2000. During last summer’s reconstitution in the early months of the COVID-19 pandemic, the smallest market cap in the Russell 2000 dropped to $94.8 million, the cutoff’s lowest point since the Great Recession.
Now, the 2021 minimum hurdle is widely expected to jump to its highest level in 13 years. “Analysts from Stephens Inc., Hovde Group and Keefe Bruyette & Woods estimate that more than 80 community banks could fall below the market capitalization cutoff” of “roughly $245 million,” according to S&P Global Market Intelligence.
Accordingly, current Russell 2000 banks with market caps at or around this level should be anticipating potential removal from the prominent U.S. small-cap equity benchmark.
May and June 2021 Milestones
Banks’ and other issuers’ market capitalizations will determine where stocks are ranked on May 7 within the Russell 3000 Index of 98% of U.S. public companies, from which the smallest 2000 are drawn to reconstitute the Russell 2000.
On June 4, 11, 18 and 25, preliminary lists of additions and deletions to indexes including the Russell 2000 will be made public, per the FTSE Russell’s reconstitution schedule. On June 25, after markets close on the last Friday of the month, the Russell rebalance goes into effect.
Reconstitution impacts “more than $9 trillion in investor assets benchmarked to or invested in products based on the Russell US Indexes and concludes in traditionally one of the highest trading volume days of the year on major U.S. equity exchanges,” according to FTSE Russell.
Banks Anticipating Russell 2000 Removal
For those that are not already doing so, CEOs, CFOs and IR officers should evaluate whether their banks are in range of the market cap cutoff and continue monitoring through June.
Keep the Board Apprised
For banks likely to be removed from the Russell 2000, or on the bubble, executives should determine whether and when to begin briefing their boards. Some management teams wish to proactively address this topic with their boards and update them through the rebalancing process that concludes in late June, providing time to educate directors and offer context, rather than be forced to introduce the topic and offer rear-view-mirror explanations of “what happened” during July meetings. Considering when regular board meetings are calendared relative to the Russell reconstitution schedule can be helpful, and naturally there’s no one-size-fits-all approach for all banks or boards.
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, and just 9.3% for the S&P 500 at the end of 2020 according to quantitative equity analytics firm ModernIR. 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.
Continue Corporate Access
Don’t pull-back on engagement with sell-side analysts and buy-side institutional investors. In addition to maximizing productive virtual meeting opportunities and calls hosted by the sell-side, executives ideally should have a direct relationship with buy-side analysts and portfolio managers at most of their actively managed institutional shareholders, and certainly their largest.
For banks that don’t have those direct relationships, now is the time to step up efforts to engage with the institutional investor base, ensure that current holders understand drivers of the bank’s 2020 performance and disclosed expectations for 2021, the corporate strategy, and the quality and depth of the management team.
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 small-caps while minimizing their trading costs.
Ramping up prospective institutional investor targeting and engagement with active managers, with particular emphasis on value-oriented strategies, may also be appropriate beginning in early May, if those efforts are not already underway this month. And, of course, first-quarter reporting in April is a natural opportunity to ensure that a bank’s performance and prospects are articulated in a clear and compelling way.
Jeff Schoenborn is a managing director in Lambert’s banking and financial services practice, which is staffed by investor relations professionals with experience serving more than 40 U.S. banks and a specialized focus on the industry. To learn more, connect with us today.