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Ben Graham Centre

Do high quality shareholders gravitate to companies led by good asset allocator CEOs?

  • George Athanassakos, Professor of Finance, Ben Graham Chair in Value Investing & Founder & Managing Director, Ben Graham Centre for Value Investing
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  • May 11, 2020
Do high quality shareholders gravitate to companies led by good asset allocator CEOs?

In a recent study, I asked the following question:

Do good asset allocator CEOs outperform in the stock market those who are not?

To separate good asset allocator CEOs from those who are not, I constructed a composite metric that consisted of a combination of goodwill to assets and operating margins. My hypothesis was that companies with high goodwill to assets and high operating margins are those that are managed by good asset allocators, whereas companies with high goodwill to assets and low operating margins are those that are not.  Between 1991 and 2018, on average, I found that a portfolio of US good asset allocator companies (i.e., companies with goodwill to assets averaging 38% and operating margin averaging 19%) outperformed a portfolio of bad US asset allocator companies by 33% in terms of cumulative three-year returns. These are the companies an investor should buy and hold for the long run, as these are stocks Warren Buffett would like. A non-academic version of my study appeared in the Globe and Mail on May 6, 2020. 

In an extension of this study, I next examined the following related questions:

Do companies led by good asset allocator CEOs attract high-quality shareholders?


Is it true that high quality shareholders gravitate to those companies? 

In answering these questions, I combined my research on good asset allocator CEOs with that of high-profile author Lawrence Cunningham from George Washington University who has written extensively about (Buffett-type) quality shareholders, “those who see themselves as part and permanent owners of business, who load up, stick around and engage like owners”. Cunningham has put together a database that ranks 2070 companies based on their relative density of shareholders having long average holding periods and high concentration levels (what he calls Quality Shareholder Density).  Cunningham argues that this cohort of shareholders offers advantages compared to other shareholder types (traders, indexers, and activists). When Cunningham’s database was related to the list of the 167 good asset allocator US companies found in my research as at the end of 2019, and shown in the Appendix, there were 140 companies (84%) in common.  Among those, 26% were in the top 10% in terms of Quality Shareholder Density; 56% were in the top quarter; and 75% were in the top half. 

As one would expect, based on Cunningham’s data base and my findings, there is strong evidence to suggest that good asset allocator CEOs attract high-quality shareholders and vice versa. Without asserting anything about causation, there is high correlation between skilled CEO capital allocators and attracting high quality shareholders. While it is not directly addressed in our studies, it is fair to assume that good asset allocator CEOs also tend to prefer to work for companies that have high concentration of high-quality shareholders. But this question will be addressed more carefully in a follow up study.

To see a list of US companies that met the good asset allocator criteria at the end of 2019, click here.