Manager Question of the Month: How Much Attention Do Managers Pay to Rival Trades?

When Morningstar asked in recent meetings, many active equity stock managers admitted to paying at least some attention to the trades their peers and other large investors make. Reasons for peeking ranged from learning the views of informed investors--namely, company insiders and activist investors who can drive shareholder-friendly changes--to looking for potential contrarian opportunities, or even to spy on moves by environmental-, social-, and governance-focused investors.

“We really pay attention when there’s an informed owner,” said Benjamin Garosi, a Dodge & Cox Stock DODGX manager. Well-regarded private equity investor KKR’s KKR stake in Fiserv FISV through its First Data acquisition in 2019 helped its managers become comfortable with buying payments firm Fiserv in 2020’s fourth quarter.

One activist investor that Lord Abbett’s Darnell Azeez pays attention to is hedge fund Elliott Management, which recently announced stakes in Duke Energy DUK and Dropbox DBX. “When they get in, they’re going to push management to do certain things” that are usually beneficial to shareholders, said Azeez, head of value and dividend strategies at Lord Abbett.

The firm’s analysts and managers also watch ESG investors, comparing top holdings of those investors to their own portfolios. ESG investors can use different criteria to gauge a stock’s potential. With the rapid growth in assets managed this way, investors with a different approach could affect individual stock pricing--bidding up or down stocks prized by another approach, thereby opening opportunities or posing threats to other managers./p>

But the most informed players, many managers say, are corporate executives and board members. “They know more than you,” Azeez said. “They’re not always right, but they usually know more.”

It’s important to consider management teams’ personal investment behavior when conducting due diligence on prospective companies, said John Spears, investment committee member at Tweedy, Browne Global Value TBGVX. The firm has been updating a database of insider transactions originally compiled by University of Michigan professor H. Nejat Seyhun for his 1998 book, "Investment Intelligence from Insider Trading." Spears said Tweedy, Browne’s own research supported Seyhun’s conclusions that insider trading data, when combined with other factors, such as cheap valuations, can be stock-buying signals. “It’s not some perfect quant model,” he said, but it’s worth paying attention to. Insider trading data helped convince the team to buy Chinese property management services company A-Living Smart City Services in late 2020 and early 2021 for several Tweedy, Browne portfolios, including the unhedged and hedged versions of Global Value and Tweedy, Browne Value TWEBX.

Other managers said they study a company’s shareholder base to understand its percentage of long- and short-term investors. The presence of large investors, such as pension funds or large asset management firms, can also increase the odds of big stock moves--especially in small-caps--if they buy and sell suddenly.

Big investors can move share prices up when they buy, forcing smaller managers to pay more for--or accumulate less of--the shares they want. Conversely, when giant shareholders unload holdings they can drive prices down, hurting smaller managers making the same trades.

But large sellers also can create opportunities for more value-oriented managers, said Steven Pollack, Los Angeles-based portfolio manager at Boston Partners Global Investors, a subadvisor for JHancock Disciplined Value Mid Cap JVMIX. “We react when other large sellers appear and it is a stock we like,” he said. In other words, the appearance of large sellers in a stock the strategy owns doesn’t spook Pollack and his team if they like the underlying company; instead, they will often use those occasions to buy more shares.

At least one manager said he doesn’t care what other managers are doing and doesn’t need other stock-pickers to validate his investment theses. That defiant, independent attitude is laudable; managers should clearly define and then stick to their approaches. Yet, active management is a competitive, zero-sum game, and managers ignore potentially helpful information, such as the trading activity of rivals, at their own risk. If following the trades of others was their entire process, that would be worrisome. Most, however, see value in at least being aware of who they are betting with or against.