14 Conviction
The idea behind the following “Conviction” indicator is to identify fund managers with larger positions than average, and use the assumption that this may signal some type of private information which we want to exploit.
For example if a stock is being held by 100 managers but only 2 of them have a very significant positions in that stock, this may indicate some level of exclusive knowledge which is what we want to identify.
AllocSkew
Multiplies a fund’s AuM by the direction of the difference between the average allocations of a peer group of funds and the fund’s latest allocations towards the same stock. If this difference is positive, the fund is underweight vs peers, and if the difference is negative, the fund is overweight vs peers. By summing these AuM across all applicable funds, then dividing by the sum of all AuM, we get a normalized metric. We expect this factor to reflect the percentage of AuM that is underweight a stock.
\[\text{AllocationSkew} \equiv \frac{\sum sgn(-\omega^+) \times A}{\sum A}\]
where:
\(\begin{align} \omega^{+} & \equiv \text{the difference between each fund’s reported weight in a stock and the fund-weighted average of a peer group of funds with the same geographic mandate} \\ A & \equiv \text{dollar ending assets of a fund} \end{align}\)
Interpretation AllocSkew
A positive value tells us that most funds, or at least those with a larger AuM, are underweight, meaning that only a small fraction of managers are bullish towards the stock. Similarly, a negative value indicates that many high-AuM funds are overweight the stock.
Example AllocSkew
Below shows a snippet of what EPFR’s AllocSkew Files contain:
Location: '/StockFlows5.0/QuantitativeFactors/Monthly/AllocSkew/Aggregate/AllocationSkew2022Q4.txt'
| ReportDate | HSecurityId | SecurityName | AllocSkew | |
|---|---|---|---|---|
| 46452 | 12/31/2022 12:00:00 AM | 7041220 | Apple Inc Common Stock | 0.6494 |
| 51324 | 12/31/2022 12:00:00 AM | 7049454 | Tesla Inc Common Stock | 0.7029 |
| 46339 | 12/31/2022 12:00:00 AM | 7041046 | Amazon.com Common Stock | 0.6704 |
| 55818 | 12/31/2022 12:00:00 AM | 7057091 | Microsoft Corp Common Stock | 0.6041 |
| 54319 | 12/31/2022 12:00:00 AM | 7054419 | Exxon Mobil Corp Common Stock | 0.6766 |
| 55614 | 12/31/2022 12:00:00 AM | 7056752 | Netflix Inc Common Stock | 0.7524 |
| 59716 | 12/31/2022 12:00:00 AM | 7063679 | Visa Inc USA Class A | 0.5946 |