relative to all 78 million pairs. A score of 70 means that 30% of pairs have stronger align- ment and 69% have weaker alignment.
2. 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.”
3. Last, we measured the frequency of initiation among these non-owning pairs according to their alignment score.
Results Our test demonstrated strong correlation between fundamental alignment and subsequent initiation.
• Non-owning pairs with the highest alignment scores were 8.8 times more likely than average to become owning pairs during the period (compared to an average of 1.0 times for high industry pairs).
• The frequency of initiation accelerated as alignment scores increased, as evidenced by the distribution’s convex shape. In the upper range of alignment scores, small differences in the score have a disproportionately large and positive influence on initiation.
• An alignment score of 70 is the break-even: above 70, frequency of initiation is greater than average. Below 70, frequency of initiation is lower than average.
Conclusion Many professionals in the corporate access realm encourage engagement between C-suite executives and non-owning fund managers that have high exposure to a security’s industry. For decades, the broadly shared assumption
has been that an investor with high exposure to an industry likes the industry, is familiar with it, and can be convinced to make another investment in it. Corporate executives, meanwhile, may believe
their company compares favorably to an investor’s current holding in their industry and that a face-
ni ri .org/ irupdate
to-face meeting can convince the fund manager to switch horses. However, our research finds no empirical sup-
port for either assumption. Investors with high industry exposure initiate positions in stocks in the same industry at the same rate as the average rate (and as shown above, a rate that is just under one-third the frequency of investors with low but some exposure). Meanwhile, 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. Non-owning pairs with alignment scores equal to 100 initiate at nearly nine times the average initiation rate. Tinking of initiation rates in terms of the number
of meetings or days on the road can provide helpful perspective. One engagement with an investor from the cohort
that has an alignment score equal to 100 is likely to result in as many subsequent initiations as nine engagements—say, two days of engagements—with investors selected at random (or equivalently, with investors that have high industry exposure). In short, fundamental targeting is nine times
more effective than industry targeting as it is most commonly practiced. IR
Brendan Fitzpatrick is Founder, Fitzcores LLC;
bfitz@fitzcores.com.
IR Update Commentary Articles
Commentary articles are thought- provoking perspectives that challenge traditional IR thinking and present new points of view. To contribute a commentary article for consideration, contact IR Update Editor-in-Chief Al Rickard at arickard@associationvision. com. All articles are reviewed by NIRI and the NIRI Editorial Advisory Committee. Views in commentary articles do not necessarily reflect the views of NIRI.
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