is positively correlated with subsequent initiation in the security, and convex in shape (rates of initiation accelerate as the fundamental alignment between a fund and a security increases). A misunderstanding of how portfolio managers
construct their funds can result in a substantial mis- allocation of time preparing for and participating in meetings that don’t result in the investor purchasing the
security.Used conventionally—targeting portfo- lios with high industry exposure—industry targeting is unlikely to assist in identifying new investors. Fundamental targeting, on the other hand, is much more likely to identify new investors. Details of each of the two research projects are
outlined below.
Industry-Based Targeting Methodology To assess the effectiveness of industry-based target- ing, we categorized funds by their level of industry exposure. Ten we analyzed initiations by funds in securities during the subsequent year to measure the influence that funds’ industry exposure had on the purchases. 1. Categorizing funds by industry exposure: a. We first measured and ranked the exposure of 13,477 actively managed funds to 119 industries.
b. We then grouped the funds as follows: • None = no industry exposure • 1st
• 2nd • 3rd • 4th
example, a pair where the fund had no exposure to the security’s industry was a “no industry exposure” pair. A pair where the fund had 4th quartile exposure to the security’s industry was a “high industry exposure” pair.
3. To isolate initiations during the following year, we removed 3.7 million “owning pairs” (where the fund half of a pair already owned the security half) from the 78 million total number of pairs leaving 74.3 million “non-owning pairs.”
quartile = bottom 25% of ranking that had at least some industry exposure quartile = next higher 25% quartile = next higher 25%
quartile = funds with the highest industry exposure
2. Classifying fund and security combinations a. We created fund-security combinations (or “pairs”) between the 13,477 funds—now cat- egorized according to their exposure to 119 industries—and each security in our database (5,790 securities) resulting in 78 million pairs.
b. We then classified each pair according to the fund’s exposure to the security’s industry. For
4 0 S P R I NG 20 2 5 ■ IR UPDAT E
We observe that investors have strong and persistent tendencies to initiate positions in securities that have fundamental attributes similar to the stocks they currently own, independent of any consideration of industry.
4. Last, we measured the frequency of initiation among these non-owning pairs according to their starting level of exposure to the 119 industries.
Results • Overall, industry exposure was negatively correlated with subsequent initiation, provided a fund had at least some industry exposure.
• Funds with low but some exposure to a security’s industry were 2.8 times more likely than funds with high exposure to initiate a position in the industry during the subsequent year.
ni ri .org/ irupdate
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