Management teams and investor relations officers (“IROs”) spend valuable time and money to gain insight into their companies’ shareholder base makeup. This is done for good reason, as understanding your institutional ownership yields multiple benefits, including the ability to:

  • Determine whether the investment style of shareholders (e.g., Value) aligns with your business outlook (e.g., Growth);
  • Ensure that your investor messaging is consistent with your shareholders’ investment orientation;
  • Identify potential activists and those firms that will likely support the company or the activist;
  • Understand the evolution of passive versus active holders of your stock; and,
  • Identify likely supporters and sellers at a time of significant change, such as a transformational acquisition.

To accomplish this task, companies rely heavily on quantitative descriptions and analytical services for information about institutional investors, including assets under management, asset turnover, equity holdings, and key personnel.  These services also provide the “investment style” of institutional investors’ firm descriptions to give some understanding of how they approach investing.  For example, is your stock primarily held by Value, Growth or Growth at a Reasonable Price (“GARP”) investors, or how many shares are held by index funds?

The answers can largely depend on the service you use, as different services produce different results. To understand these variations, we compared investor base summaries of well-known, public companies provided by the leading analytical services. The implications of this disparity could be far-reaching for investor relations strategies, since the markedly different results could lead companies to draw misleading conclusions about the makeup of their institutional shareholders. Our findings were consistent across the stocks we analyzed.

Apple Inc. (AAPL) is a good example. Of its Top-25 holders, only six firms had the same investment styles across these services – and all of these holders were index shops. Granted, Growth and GARP orientations can be similar, but nearly half of the inconsistencies involved an investor categorized as Value by one service and Growth by another. Even more surprising, two of the services categorized two of the Top-25 investors as Passive while the third labeled it Active.

Another example is Coca-Cola Company (KO), where only six of the Top-25 holders were categorized similarly across the services – again, all index firms. Coca-Cola’s largest holder, Berkshire Hathaway, was categorized differently across the three services as Value, Growth and GARP.

We looked at the top holdings of Apple, Coca-Cola, Walt Disney Company (DIS), and General Electric Company (GE). The table below shows a sampling of 20 buy-side firms that held shares in one or more of these four issuers as of June 30, 2017, and the dominant style designations of each from the primary investor analytics services. While the services all generally agreed on the index category, they differed considerably otherwise.

Dominant Fund-Level Investment Style of 20 Buy-Side Firms
Based on Investor Analytics Services Data*

Institution Name Service #1 – Dominant Style Service #2 – Dominant Style Service #3- Dominant Style
1 AllianceBernstein, L.P. (U.S.) Value Growth Core Growth
2 Berkshire Hathaway, Inc. Value Growth GARP
3 BlackRock Advisors, LLC Value Growth Core Growth
4 BlackRock Investment Management (U.K.), LTD Growth Growth Core Growth
5 BNY Asset Management Value Growth Income Value
6 Capital Research Global Investors (U.S.) GARP Growth Core Value
7 Capital World Investors (U.S.) Value Growth Core Value
8 Columbia Threadneedle Investments (U.S.) Value Growth Core Growth
9 Fidelity Management & Research Company Growth Growth GARP
10 Franklin Advisers, Inc. Value Growth Income Value
11 Harris Associates, L.P. Value Growth Core Value
12 J.P. Morgan Investment Management, Inc. Growth Growth GARP
13 Lazard Asset Management, LLC (U.S.) Value Growth Core Value
14 MFS Investment Management Value Growth Core Growth
15 Morgan Stanley & Company, LLC Broker Growth Core Growth
16 Norges Bank Investment Management (Norway) Value Growth Core Value
17 State Farm Investment Management Value Yield Core Growth
18 T. Rowe Price Associates, Inc. Growth Growth GARP
19 TIAA-CREF Investment Management, LLC Growth Growth GARP
20 Wellington Management Company, LLP Value Growth Core Value

* as of June 30, 2017

Distribution of Firm-Level Investment Style of 20 Buy-Side Firms
Based on Investor Analytics Services Data*

Investment Style Service #1 Service #2 Service #3
Growth 25% 95% 35%
GARP 5% 25%
Value 65% 40%
Other 5% 5%

* Top-25 holders of Apple, Coca-Cola, Walt Disney Company, and General Electric Company as of June 30, 2017

Why don’t the classifications match?

Unlike quantifiable information, such as assets under management and turnover, each firm uses a proprietary methodology in assigning investment style. Proprietary approaches include:

  • Service #1 assigns styles based on certain basic parameters, as well as its “proprietary knowledge of the firm’s investment behavior.” It considers Value investors as those that invest in companies that, in general, trade at low valuation levels (Price/Earnings, Price/Book, and Price/Earnings Growth ratios) in relation to the market and their peers, and in relation to their own historic valuation levels. Service #1 considers these companies to be fundamentally strong, exhibiting slow and steady growth characteristics over time.
  • Service #2 assigns investment styles more formulaically. The primary screen for Value investors is the Price/Book ratio. Institutions that have not been classified with a Yield or Deep Value style, and hold more than 70% of their assets in stocks with below market Price/Book ratios, are candidates for Value. These stocks are then screened by their Price/Earnings ratios, with only the portfolios that hold more than 70% of their assets in stocks with below market Price/Earnings ratios being classified with a Value style.
  • Service #3 has more than a dozen investment style designations. For example, “Core Growth” managers are willing to pay premium Price/Earnings multiples for mid- or large-cap issuers that have historically performed near the top of their sector or S&P 500 in terms of growth, profitability and revenue. “Growth” investors are considered slightly more aggressive than “Core Growth” and will pay higher multiples and trade at a more active pace, but will not pay extremely high multiples associated with hyper growth stocks.

In addition, definitions of investment styles can change. What qualifies for Growth or Value one year may shift the next year, depending on market dynamics (anyone remember 2008-2009?). So even if the same service is used to analyze shareholder movements over time, the year-over-year investment style comparisons could change somewhat.

The investment focus of a particular buy-side firm’s portfolio may also shift. For instance, the emphasis of a portfolio may have evolved from Growth last year to GARP this year due to stocks becoming more expensive.

Do the differences really move the needle?

The answer is yes, in many cases they do. Looking at Apple and Coca-Cola, the services generated vastly different views of their shareholder bases. Growth-oriented investors within the Top-25 reportedly held an estimated 10%, 20% or 49% of Apple’s shares, depending on which service was used, and an estimated 7%, 10% or 57% of Coca-Cola’s shares.

Fund-level Data Paint an Entirely Different Picture

Perhaps more importantly, while a buy-side firm’s overall investment style may be defined as Value or Growth, many of these shops manage multiple funds that cover the spectrum of investment styles. In analyzing 15 issuers, we found numerous examples of their Top-25 holders’ overall style designation clashing with the style of the individual funds that actually held the stock. While this distinction is critical, the services typically summarize shareholder ownership based only on the firm-level classification, ignoring fund-level differences.

For example, Fidelity is classified overall as a Growth investor by two of the three services, yet shares of a company’s stock could be held in Fidelity’s Value and/or Index funds. Let’s say Fidelity holds 3% of XYZ company’s shares, but by digging deeper, we find that the stock is, in fact, held in a Value fund. When an analytics service summarizes XYZ’s shareholder base data, it will do so at the firm level. This means the service will misidentify that 3% Fidelity ownership in XYZ as Growth (at the firm level), and not as Value (at the fund level). Therefore, the summary holdings of XYZ investment style data will be incorrectly identified. Since this generalization extends across many buy-side firms, XYZ’s total shareholder makeup as summarized by these analytics services will likely be misleading.

In addition to the risk of having key shareholders’ investment styles mislabeled, “active” firms can be misclassified as “passive,” and vice versa. We came across several quantitative funds that are labeled as Passive investors from these services, yet have active “override” capabilities – the ability to make changes by the fund manager – that can be invoked to prevent positions from being automatically liquidated. Sometimes these quant funds are labeled passive, and some fund managers may meet with management.

Why is This Issue Important?

If you lead your company’s investor relations strategies, this topic is critical because:

  • Relying on firm-level summaries could mean you are not accurately measuring the composition and changes in your shareholder base. In turn, this opens the door to reporting incorrect information to your Board of Directors.
  • You may be evaluated by your management team on performance around shareholder base trends that are not accurate.
  • When targeting potential new investors for your company’s stock, you could overlook meaningful opportunities to engage with fund managers and analysts whose fund-level style aligns with your company, but differs from the firm-level style.
  • Most importantly, a misread of this information – particularly the composition and trends of the shareholders moving in and out of the stock – will make you less strategic with messaging, targeting and potentially explaining stock price movements.

What Can Be Done?

While shareholder analytical services provide valuable information about the buy side on an efficient platform, it is clear that an IRO and his/her executive team can’t take a service’s style summary at face value. In essence, know the limitations of the data. To gain a deeper, more accurate understanding of a company’s shareholder base, it is often essential to identify the core fund or funds holding the stock, particularly for large multi-product firms. In addition to knowing whether your company’s stock is held in a Growth, GARP or Value fund (or some combination of them), a detailed analysis could also reveal whether a stock is held in a Passive or Quant fund, even though the firm may be viewed overall as an active investor. Such work could also uncover opportunities to target different investment teams within a firm that could become shareholders.

A firm’s website, particularly a boutique or focused (not necessarily small) firm, can also provide valuable information on the investment style and philosophy of the firm. What key performance characteristics are attractive to the firm? How does your investment story align with the firm’s investment criteria, in terms of market capitalization, industry participation, growth drivers, aspirational targets and performance metrics? When in doubt, pick up the phone and give the portfolio manager or analyst a call. They might be glad to hear from you, and it could help to build a relationship with a potential long-term shareholder. More direct contact with investors will likely be coming anyway, as the investment industry adapts to new regulations and practices driven by the adoption of MiFID II.

Finally, third parties could be an important resource for you. The sell-side analysts following your company could provide insight into an investment firm and its style. Shareholder surveillance firms that have regular interaction with the buy-side, and do not just rely on databases themselves, are focused on providing value-added services in this area.

A little bit of extra work in analyzing your shareholder base can go a long way to provide deeper insight and actionable intelligence on your current shareholders by identifying potential new shareholders and gaining an accurate view of how your shareholder base evolves over time.

To read more on related topics, follow these links: More Active Investors Rely on Non-GAAP vs. GAAP Reporting in Analyzing StocksThe Secret to High ROI Perception Studies; and Proactively Attract Investors in an Increasingly Passive World.