Should you follow FIIs?

FIIs have been quite the players in Indian markets, alarming and exciting market participants as they pick or step away from stocks and markets. With such blame or credit coming their way, would copying their moves have helped in adding outperformers to portfolios?

For the most part, yes. This trend is gleaned from the analysis of shareholding patterns and stock returns for the past four quarters, of all listed companies which have declared their December ’10 shareholding. Using the returns of the BSE 500 index as a measure of performance, stocks which saw increase in FII exposure, however marginal, beat the broad market. Conversely though, stocks in which FIIs pared stakes did not necessarily underperform markets.

Outperformers

As markets went into corrective mode, the BSE 500 index declined 7 for the December and September quarters, to date. In this period over half the stocks which saw FII stake hikes in each of the quarters managed either positive returns or contained downsides far better.

For instance, MindTree, in which FIIs increased stakes by 3 percentage points in the December quarter over the one before, declined a lower 3 per cent than the broader market. In Orchid Chemicals, FIIs hiked holdings by 9 percentage points in the September quarter over the June quarter. The stock has managed a 14 per cent return.

Underperformers

The strategy of following FIIs, however, loses steam when it comes to reducing stake. FIIs have not consistently shed stakes in underperformers. In the March and December quarters, less than half these stocks fared worse than markets.

Continuing the example of Orchid Chemicals, FIIs reduced holdings by 3 percentage points in the December quarter. The stock, however, lost less than one per cent from then to date. In Indiabulls Financial Services, FII holding dipped 4.9 percentage points over the quarter before. The stock, however, is up a massive 57 per cent.

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