With an index owner, IR is increasingly competing for understanding, trust and support
The rise of index investing has created a strange problem for investor relations. Some of the largest shareholders on a company’s register may be investors that IR cannot persuade to buy another share. You can improve disclosure, sharpen the equity story, hold a brilliant capital markets day and convince the market that the company is materially undervalued. An active fund manager can respond by increasing their position. An index tracker generally cannot. Its mandate, rather than its conviction, largely determines how much it owns.
And yet that same shareholder may have a meaningful say on remuneration, board appointments, capital allocation, governance and other issues that go to the heart of how a company is run. That creates a paradox which I think IR has yet to absorb.
The shareholder you cannot win as an investor may still be one of the shareholders you most need to win as an owner.
Passive is an increasingly unhelpful word
The Economist recently marked the 50th anniversary of Vanguard’s first index fund with a provocative argument: index funds have transformed investing, but we should probably stop calling them passive. I think it is right, although the implications for listed companies go rather further. At the product level, ‘passive’ still makes sense. The objective of a tracker is to replicate an index rather than beat it.
An index tracker’s mandate, rather than its conviction, largely determines how much it owns
But even index investing contains plenty of active choices. An investor choosing the S&P 500 rather than a global index is making a judgement about geography and concentration. Choosing a Nasdaq tracker is an even more obvious decision about where you think exposure should sit. The managers of index funds are not inactive either. They make decisions about implementation, rebalancing, securities lending and how efficiently to replicate an index.
For an IRO, however, the more important distinction comes after the shares have been bought. An index fund may be passive in deciding whether to own a company. That does not make its owner passive in deciding how to behave once it does.
The large index managers vote. They engage with companies. They have stewardship teams and published governance policies. They form views on boards, executive pay, shareholder proposals and material risks. The investment mandate may be mechanical, ownership is not.
A personal declaration of interest
There is an irony here for me. I have spent more than 25 years in investor relations and have sat across the table from a very large number of active fund managers. Many have been exceptionally good investors. Yet most of my own annual ISA contributions have gone into trackers.
That is not a criticism of the fund managers I have met. It reflects the difficulty of consistently beating an index after fees. S&P’s SPIVA data show that 79 percent of US large cap active funds underperformed the S&P 500 in 2025. Over 15 years, the proportion was almost 90 percent.
So I am hardly hostile to index investing. Quite the reverse. But liking index funds as an investor does not mean ignoring what their success has done to the shareholder register.
IR increasingly has two different audiences
For much of my career, the conventional model of investor relations was reasonably straightforward. Explain the business well. Build credibility. Improve investors’ understanding of strategy and valuation. Find investors who believe the market has mispriced the company and persuade them to allocate capital. That remains an essential part of IR.
Active investors still matter enormously because they can express a view through position size. If they think a company is undervalued, they can buy more. If they lose confidence, they can sell. Their decisions shape price discovery and ultimately affect the cost of capital.
But index ownership introduces a second relationship with a quite different economic logic. A tracker does not normally buy more because the CEO gave a convincing answer at a roadshow. Its ownership is primarily determined by index membership and weighting.
That doesn’t make the relationship irrelevant. It changes what the relationship is for. With an active investor, IR is partly competing for capital. With an index owner, IR is increasingly competing for understanding, trust and support. Those are not the same objectives. Indexing has not made traditional IR less important. It means IR has acquired another job.
Ownership, valuation and voting are different things
This distinction becomes even more important because ownership, price formation and voting power no longer necessarily sit neatly together. A large tracker can be an important shareholder without being the investor setting the marginal price of the shares. Conversely, an active manager with a relatively modest holding can matter disproportionately to valuation because they can change that holding substantially as their view changes.
An index fund may be passive in deciding whether to own a company. That does not make its owner passive in deciding how to behave once it does
Then there is governance. The institution whose name appears on the register may have separate portfolio management, stewardship and voting functions. In some cases voting authority can sit with underlying clients or be exercised through different voting policies.
Simply knowing that BlackRock, Vanguard or another large institution owns 5 percent of the shares doesn’t tell an IRO who they need to speak to about a particular issue. Nor does it tell them who ultimately influences the vote.
That leads to a question I think IR teams increasingly need to ask: Knowing who owns our shares is useful. But who actually has discretion over the decisions that matter?
So what should IR do differently?
We have spent decades building an IR model largely around the idea that better communication can influence the allocation of capital. Index investing breaks that link for part of the register. Communication can still influence understanding and support. It just doesn’t necessarily influence how much stock the investor owns. That is a fairly profound change to the purpose of engagement.
When it comes to changes IR can make, the first is to stop treating ‘passive’ as shorthand for ‘unimportant’.
A better shareholder analysis should distinguish between concentrated active managers, benchmark-aware active funds, pure index trackers and shorter-term or event-driven investors. They behave differently because they are trying to achieve different things.
Second, understand where voting authority actually sits.
Knowing the institution is no longer enough. IR needs to understand its stewardship structure, published policies, engagement process and, where relevant, how voting authority may be delegated or passed through.
Third, treat governance conversations as part of mainstream IR rather than something that appears shortly before the AGM.
Board composition, succession, remuneration, capital allocation and risk oversight are now a bigger part of the wider shareholder relationship. That requires closer coordination between IR, the company secretary, legal teams and the board.
Fourth, understand index mechanics. Index inclusion and exclusion, changes in free float and benchmark rebalancing can affect ownership and trading without saying anything whatsoever about investors’ views of the company. An IRO doesn’t need to become an index specialist but should be able to explain those movements to management and the board.
Finally, don’t redefine IR success. Widen it.
Valuation, investor targeting and the quality of the shareholder base still matter as much as they ever did.
But perhaps the scorecard should now also include the resilience of shareholder support, the quality of stewardship relationships, governance understanding and whether the company really knows where influence sits across its register.
A different kind of investor relations
There is an understandable temptation to turn the debate about index investing into an argument between active and passive management. I don’t think that is particularly useful.
Index funds have been an extraordinary financial innovation. They have lowered costs, widened diversification and given ordinary investors access to returns that many active managers have struggled to beat. They are not going away. The more interesting question for IR is what happens when the structure of ownership changes faster than the profession’s assumptions about it.
The great irony of index investing is that it has created shareholders whose decision to own you may have little to do with your investment case, but whose decision to support you can matter enormously. Understanding that difference may now be one of the most important jobs in investor relations.
Alex Dee is the former head of IR at LendInvest, Man Group and NEX Group, as well as a three-time IR Impact award winner
