February 15, 2023

The Odds

What odds are tolerable to you?

If you’re betting – I don’t but follow me – you might take a longshot.  Low odds, big returns.

Illustration 88895310 © Alain Lacroix | Dreamstime.com

But in investor-relations we’re playing with house money.  It belongs to shareholders.

The odds that we can grow shareholder-value by talking to stock-pickers are not good. There are vastly better probabilities for us. And if we know, we have house odds.

Let me explain.

Morningstar puts out a semiannual barometer comparing Passive and Active Investment performance.  The most recent is through September 2022.  It looks at whether Active funds beat Passive peers and benchmarks over periods.


Actively managed U.S. large-cap equity funds’ recent woes match a longer trend: They generally succeed less often than active U.S. mid- and small-cap funds over long horizons. In the decade through June 30, 2022, 10.7% of active large-cap funds lived and outperformed their average passive peer, compared with success rates of 24.7% and 31.7% among actively managed mid- and small-cap funds, respectively.

Active managers in the large-growth category have had a particularly difficult time delivering value for investors. Nearly 70% of the active funds that existed in this category 20 years ago have died, and just 2.3% managed to both survive and outperform their average passive peer.


Over the last decade, between 11-32% of Actively managed funds likely attracted capital.

Because you have to beat the benchmark to raise money. In Large Cap Growth, it’s worse. Most of the funds are gone, and just 2% beat the benchmark over twenty years.

Viewed another way, if 70% of Active funds failed to attract flows, targeting investors – without at minimum knowing these data – has a three in ten shot of success.

Acceptable odds?

I’ll hazard most of us don’t think about whether legacy IR – targeting investors – has reasonable odds of success.  Yet that’s the whole basis of risk capital. Right?

So, what’s going on?  Money over the past two decades has shifted dramatically from seeing stocks as individual stories to treating them like products in a diversified model.

Tying in how the market works, rules push prices toward the midpoint, which Passives need.

EDITORIAL NOTE: New proposals from the SEC (there’s a NIRI Virtual Program on them Mar 8 at noon ET) will magnify the migration toward midpoints.

Here’s a better idea than kicking against the goads. Investor Relations pros need to understand and report to execs what the money is doing. It’s a key way we add value in a market dominated by Passive Investment.

Odds are, we’re blowing money otherwise.

To those weeping and gnashing teeth, stop.  It’s not the end. It’s a new beginning. We have to adapt. Let’s redefine the value of IR.

What are the odds that a company with $700 million of market cap can organically grow to become a large cap (call it $20 billion)?  Statistically, 1%.  The Board and the c-suite should understand where the best odds of shareholder returns lie.

Conclusion? M&A on a big scale is vital for small caps.

And it’s also the path to liquidity.

Passive money, a giant complex that routinely rejiggers weightings in equities and bonds through macroeconomic models, needs strong odds that it can get into and out of stocks.

It’s why Passive and Active investors alike own SPY, the State Street S&P 500 Exchange Traded Fund, at rates almost 20% higher than the underlying stocks. Heck, activist Jana Partners in its December 13F owned SPY. You’d be surprised how many do.

I noticed yesterday that KO had about 300 shares at the bid, 700 at the offer.  At the same time, SH, an inverse S&P 500 ETF that rises when the index falls, had over two MILLION shares at both the bid and ask.

There you go. KO wasn’t even trading at a penny spread.

Quast, you’ve lost me. Your point?

I’m saying that before we do anything in the IR chair, we need to understand how the market works and what the money is doing. And we should know the odds, the probabilities, that our actions and budgetary expenditures will produce returns.

It’s not that hard. I’ve done it here.

Keep telling the story, sure. But let’s make a determination.  A chunk of our time, 30-50%, should be spent understanding how the market works, what the money is doing, and communicating important and ever-changing facts about both to the c-suite and Board.

That’s IR.

Then we can help them stack the odds of success as a public company in the favor of shareholders.

That’s our job.

Ask:  How many top 25 holders are beating the passive competition?  What are the rules that govern how and where your stock trades?  What kinds of investors can get into and out of it?  What are your Passive characteristics?

The odds are, if we’re seeing IR as only “telling the story” we’re going to fail.  Let’s not fail!  Let’s win – by understanding the money, the market, the odds. (And we can help you.)

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