Smart Money Moves

The stock market has been through a turbulent phase since the last quarter of 2016. While market crashed towards the end of last year due to demonetisation and Trump’s election as US President, the market recovered after March this year and went on to hit record highs.

The flood of domestic money that entered the equity market after demonetisation is one of the reasons why the Sensex surged in 2017. Foreign Portfolio Investors (FPIs) blew hot and cold in this period, going on a buying spree in some months and selling in others.

Institutional investors, both foreign and domestic, are called ‘smart money’ in stock market parlance since they have the skills to make the right decisions in stock selections. We analysed the changes in the shareholding pattern of companies forming the BSE 500 basket between September 2016 and September 2017 to find out what the smart investors did in this turbulent period.

Mutual funds have been the most optimistic set, increasing their holdings the most, from ₹4,98,763 crore in September 2016 to ₹7,44,060 crore in September 2017; recording a 49 per cent jump. This buying spree has also increased their stake in BSE 500 companies from 4.5 per cent to 5.7 per cent.

FPI holdings, on the other hand, have seen a more moderate 19 per cent increase in value. Their stake in the BSE 500 companies has remained more or less stagnant at 20 per cent in the one-year period to September 2017.

Mutual Fund moves MFs were in vogue in the period under consideration, with fund houses witnessing humongous inflows. The monthly flows into equity funds between September 2016 and September 2017 averaged ₹12,160 crore, up 155 per cent from the monthly flows of ₹4,770 crore recorded in the corresponding period the previous year. Investors, flush with funds post-demonetisation, channelled much of their savings into MFs, given the stagnating real estate and gold market.

Stocks in the non-banking finance sector were the most preferred by mutual funds with their stake increasing in 32 NBFCs in this period. Given the lacklustre performance of other sectors, healthy earnings growth and visibility in NBFCs prompted mutual funds to up their holding in stocks such as Capital First, Equitas Holding, and Gruh Finance. A niche focus and ability to manage risks within the segment kept MF interest going in this space.

It is also apparent that MFs adopted a contrarian strategy, preferring to increase their exposure to beleaguered sectors such as banking, pharmaceuticals and IT. These were among the top 5 sectors in terms of the number of companies that have recorded increase in MF stake. With the sharp run-up in prices making growth stocks pricey, MFs seem to have turned their attention to sectors where stock prices had been beaten down due to various concerns.

The highest increase in MF stake was in Max Financial, with holding up from 18 per cent to 30 per cent. Other stocks that witnessed similar sharp increases were Raymond, Somany Ceramics, Nava Bharat Ventures, Hindalco and Nilkamal. While some of these stocks were bought for strong fundamental prospects and relatively cheaper valuation, others were either turning around or showing improved prospects.

There is no sectoral trend visible in stocks in which MFs have pared stakes. Stocks such as Rain Industries, Crompton Greaves, and Multi Commodity Exchange witnessed sharp drop in MF holdings. Profit booking due to sharp increase in stock price making valuation rich appears to be the primary reason for paring stakes while some stocks, such as Astra Microwave, Advance Enzymes and Inox Wind, were exited due to deteriorating prospects.

Interestingly, MFs have been slow in exiting stocks that delivered steep losses, thus staying true to their long-term leanings. For instance, hit by regulatory woes, stocks such as Ajanta Pharma, Glenmark Pharma, Divi’s Lab and Sun Pharma have delivered over 32 per cent losses but MF stakes in these companies have reported minimal change during the period under consideration. In Reliance Communication, which lost nearly 60 per cent, MF stake has increased by 0.8 percentage points.

Fund managers struggled to find stocks to invest in, given that most of the high-growth companies were trading at a stiff valuation. They therefore had to drill lower to find mid and small-cap stocks to invest in. Among the top 20 stocks that witnessed a sharp increase in MF stake, 15 stocks had market capitalisation less than ₹10,000 crore.

Following FPIs Foreign Portfolio Investors infused $933 million into equity markets between October 2016 and September 2017. But there has been no change in their overall stake in BSE 500 companies in this period.

Bank and NBFC stocks were the preferred choice of FPIs too in the period under consideration. But while mutual funds were more bullish about these sectors — as evidenced by the fact that companies with decrease in stakes were fewer in these sectors — FPIs also took stock-specific calls in the banking and NBFC space; reducing stakes in a number of bank and NBFC stocks, such as Manappuram Finance, IDFC, Dewan Housing Finance and Repco Home Finance.

Foreign investors were also less optimistic about stocks in troubled sectors such as pharmaceuticals and IT, with more stocks recording reduction in FPI stakes in these sectors. FMCG is another sector that saw FPI’s stake reduction, probably due to soaring valuations.

The highest increase in FPI stake was recorded in Fortis Healthcare, up 19 percentage points, followed by Shriram Transport Finance by 18 percentage points. Most of the stocks where FPIs have increased stakes substantially have shown improved financial performance, barring a few such as Fortis Healthcare, where regulatory relaxation in FPI holding limit resulted in a sharp increase.

Deteriorating financial as well as stock price performance seems to have led to FPI exits in stocks such as Manappuram Finance, Indian Hotels and HDIL. In Nava Bharat Ventures, while mutual funds upped stakes, anticipating a turnaround, FPIs seem to have exited early.

While MFs have been more confident about buying into mid and small-cap stocks, FPIs have been a little more cautious. Among the top 20 stocks that witnessed a sharp increase in FPI stake between September 2016 and 2017, only eight stocks had market capitalisation less than ₹10,000 crore, implying that FPIs preferred stocks that were liquid so that exit does not get too difficult.

Who was smarter? Who fared better with their investment calls, MFs or FPIs? We tried to weigh the performance of MFs and FPIs on a few parameters to see which category is smarter. These are, of course, aggregate numbers and specific fund houses could have performed better or worse than what the total implies.

When it comes to picking multi-baggers, FPIs have been more savvy. Among the BSE 500 stocks, there were 30 multi-baggers between last September and this. While FPIs increased stakes in 21 of these stocks, MFs increased stakes in 17. This is, however, a chicken-and-egg situation as MF and FPI buying tends to push up stock prices due to the impact cost.

If we consider the stocks that have gained the most, FPIs appear to have made better bets. In Indiabulls Ventures, which gained 918 per cent in the 12 months since last September, FPIs have increased their holding by 13.4 percentage points while MFs have no stake in the stock. In stocks such as Adani Transmission, Bombay Dyeing, Motilal Oswal and Sterlite Technologies that gave bountiful returns, FPIs have expanded stakes more than MFs.

If we consider stocks that have gained between 20 and 100 per cent, there were 195 such stocks in the period under consideration. Mutual funds have taken the right calls in 130 stocks, bettering FPIs who increased stakes in only 115 stocks.

We tried to see if the financial performance has influenced the decisions of mutual funds and foreign portfolio investors. It is seen that mutual funds give more weightage to financial performance of companies, when compared to foreign investors.

There were 210 companies that recorded more than 10 per cent growth in sales in the September 2017 quarter compared to the same quarter in 2016. While FPIs have increased stakes in 115 of these companies, mutual funds have increased their holdings in 132 companies.

Similarly, 255 companies recorded more than 10 per growth in net profit in the September 2017 quarter when compared to September 2016 quarter. While FPIs have expanded stakes in 132 of these companies, mutual funds have increased holdings in 166 of these companies.

To sum up, both MFs and FPIs have done well in cornering stocks that gave high returns but FPIs seem to have taken higher risks and hence reaped higher rewards. MFs have, however, played it safe with fundamentally sound companies that have shown improvements in earnings.

What retail investors did

Retail investors, that is, those holding stake up to ₹1 lakh, have not fared too well when compared to mutual funds and foreign portfolio investors in the period between September 2016 and September 2017.

They have not been able to latch on to the top performing stocks unlike the institutional investors. Of the 27 multibaggers among the BSE 500 companies, retail investors have reduced stake in 17. A similar trend is seen in the 188 stocks that gave returns between 20 and 100 per cent; retail investors have decreased stake in 100 of these companies, including South Indian Bank, Ashok Leyland and NIIT Tech.

A relatively shorter investment horizon and impatience could be the reasons for earlier exits from stocks that gave outsized returns. These investors have also run after mid and small-cap stocks in this period. Among the top 20 stocks where the retail stake was high, 18 stocks had a market capital of less than ₹10,000 crore. Sector-wise, the preferred choice for these investors was the finance sector, where they have increased stakes in 31 companies, including Ujjivan Financial Services, Max Financials and GIC Housing Finance. They have, however, reduced stakes in banking and FMCG stocks forming part of the BSE 500 index.

If we consider the top 10 stocks that saw a sharp increase in retail investor stake, these are companies such as Titagarh Wagons, BF Utilities and Texmaco Rail that have recorded steep losses in the recent September 2017 quarter. Their top preference included stocks from diverse sectors such as construction, capital goods, sugar and pharma.

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