Self Help

It takes big demand to move supply up, and the largest source of demand for stocks is by far the institutional buyer. A stock certainly does not need a large number of institutional owners, but it should have at least a few such sponsors. Three to ten might be a minimum or reasonable number of mutual fund sponsors, although some stocks might have a good deal more.

The would-be winning investor should learn to sort through and recognize that certain institutional sponsors are savvier, have a stronger performance record, and are better at choosing stocks than others are. I call it analyzing the quality of sponsorship.

What Is Institutional Sponsorship?
Sponsorship may take the form of mutual funds; corporate pension funds; insurance companies; large investment counselors; hedge funds; bank trust departments; or state, charitable, and educational institutions.

For measurement purposes, brokerage firm research department reports are not institutional sponsorship, although a few exert influence on certain securities. Investment advisory services and market letter writers are also not considered to be institutional or professional sponsorship in this definition.

Financial services such as Vickers and Arthur Weisenberger & Co. publish fund holdings and investment performance records of various institutions. In the past, mutual funds have tended to be slightly more aggressive in the market, but banks have managed larger amounts of money. More recently, numerous new “entrepreneurial type” investment counseling firms have been organized to manage institutional monies. Performance figures for the latest 12 months plus the last three-to five-year period are usually the most relevant. However, results may change significantly as key portfolio managers leave one money management organization and go to another. The institutional leaders continually rotate and change.

If a stock has no professional sponsorship, chances are that its performance will be more run of-the-mill. The odds are that at least several of the more than 1000 institutional investors have looked at the stock and passed it over. Even if they are wrong, it still takes large buying to stimulate an important price increase in a security.

Also, sponsorship provides buying support when you want to get out of your investment. If there is no sponsorship and you try to sell your stock in a poor market, you may have problems finding someone to buy it. Daily marketability is one of the great advantages of owning stock.