Brokers and issuers often use the sales strategy of targeting investors that hold peers for incremental or new investment in an issuer. This strategy is called ‘peer targeting.’ Although it may seem intuitive to target investors who are likely familiar with the issuer’s business by virtue of owning a peer, a recent study conducted by S&P reveals that most investment is not connected to investment or divestment in an issuer’s peers, but rather influenced by the company’s fundamentals e.g. reflecting growth, profitability, valuation and risk of the shares.
We explored whether peer targeting is the best approach and what alternative strategies brokers and issuers can use to expand their potential market. Here are the key:
- Among the issuers included in the study, the median count of peers held by the issuers’ largest fund owners was zero.
- For the typical issuer, 73% of shares outstanding were held by investors that did not own a peer.
- Of the minority of portfolios that owned peers, the investment in the peer group was less than 2% for the majority (57%) of them.
- In no case did the study observe an investor selling a peer in the same period during which the investor purchased the issuer.
- Alternative marketing strategies would likely improve effectiveness.
The level of ownership in peers by an issuer’s sample shareholders suggests that peer ownership cannot explain the majority of investor decisions. While peer targeting may seem intuitive – why not pitch Coke to a holder of Pepsi? – brokers and issuers are likely to expand their potential market by employing alternative fundamental targeting strategies.
Fundamental targeting represents an alternative approach to understanding investor decisions. This approach endeavors to identify a portfolio manager’s preferences for various levels of growth, profitability, valuation, income, risk tolerance, and other fundamental factors. Managers consistently select stocks whose fundamental attributes are aligned with such preferences. Whereas the assumption that portfolios aggregate investment in in-favor peer groups runs counter to the principle of diversification, the assumption that managers select stocks with favorable fundamental attributes – independent of industry – allows for a high degree of diversification.
The S&P study indicates that issuers not in industries such as banks, REITs, and natural resources are likely to have less success with peer targeting than what the data presented suggests.
Brokerages, which tend to be organized along industry lines, may be well-served by overcoming any institutional bias to limit marketing efforts to an industry silo. Likewise, issuers are likely to have more productive meetings with non-holders if they temporarily suppress their natural instinct to compete with peers, in this case, for their investors.
It’s important to note that the study doesn’t suggest that an issuer’s peers have no relevance to portfolio managers. Surely portfolio managers consider industry outlook and an issuer’s valuation and performance relative to competitors. However, the study reveals that peer ownership is not a driving factor in investment decisions even when some (modest) level of peer ownership exists, concurrent with ownership in the issuer.
In conclusion, while peer targeting may seem intuitive, brokers and issuers are likely to expand their potential market by employing alternative fundamental targeting strategies. Peer ownership is not a driving factor in investment decisions even when some level of peer ownership exists, concurrent with ownership in the issuer. Therefore, issuers not in certain industries are likely to have less success with peer targeting. Fundamental targeting represents an alternative approach to understanding investor decisions and allows for a high degree of diversification. Brokers and issuers can improve effectiveness by adopting alternative marketing strategies that align with portfolio manager’s preferences for various levels of growth, profitability, valuation, income, risk tolerance, and other fundamental factors.
See the infographic of the study by clicking “Access the Research” button.