FIIs have picked more winners than domestic institutions over the last five years. Retail investors should take a cue from them.
Over the last five years, Foreign Institutional Investors (FIIs) and retail investors have taken divergent views on Indian stocks. FIIs have steadily bought shares even as domestic institutions offloaded them.
Foreign investors bought stocks worth Rs 3,98,536 crore from September 2008 to 2013. Domestic institutions such as mutual funds, insurance companies and banks sold equities worth Rs 52,635 crore.
With foreign and domestic institutions holding opposing views on the markets, who was right?
It was the FIIs, analysis of stock price returns shows. So should retail investors ape FIIs instead of domestic fund managers?
The answer may be yes; the reason being better performance.
The last five years have been turbulent for the equity market. Nevertheless, FIIs have managed to get their sector choices right, shows an analysis of FII holdings in 1,203 listed companies.
The analysis used shareholding pattern data from companies from September 2008 to September 2013.
FIIs go defensive
The portfolio of stocks held by FIIs clocked an average 148 per cent gain over the September 2008-13 period, compared with 51 per cent and 46 per cent rise in the Sensex and Nifty, respectively.
The stocks held by FIIs earned twice the average return of 74 per cent for the universe of 1,203 stocks.
Similarly, 461 stocks where FIIs pared their positions witnessed an average 7 per cent decline in value over the last five years.
Almost 54 per cent of the stocks in which FIIs increased their holdings outperformed the Sensex.
However, a mere 4 per cent of the stocks which saw additional investment by retail investors managed to better Sensex returns.
FIIs’ strategy of taking refuge in defensives such as pharma, healthcare and FMCG helped them stay afloat even as retail investors struggled hard to tide over the volatility in the equity markets.
It was not just the defensives that helped FIIs, but expertise in buying into other consumption-driven themes — consumer durables, auto and auto ancillaries, financials, low-beta IT and agri-inputs also lent a helping hand.
For instance, during the period September 2008-13, foreign institutions increased their holdings in pharma and FMCG companies by a third. Their domestic counterparts did exactly the reverse — reducing exposure to the sector by a third.
Retail investors followed domestic institutions and pared exposure to stocks in this space. Result: Retail and domestic institutions missed out on the big rally in these stocks.
FIIs have been adroit in cherry picking the stocks that led the rally.
For instance, stocks of Ajanta Pharma, IPCA Labs, NATCO Pharma, Lupin and Torrent which saw high FII interest also topped the performance charts raking in manifold gains in the last five years.
FII stake in IPCA Labs rose from less than 0.4 per cent in September 2008 to 25.19 per cent now.
Similarly, though the consumer theme found much favour with FIIs, they have been very selective with stock choices.
In the last five years, they upped holdings in cosmetics major Emami, nutrition biggie GSK Consumer Healthcare, P&G Hygiene, Jyothi Labs and biscuit maker Britannia Industries.
For instance, the holding of foreign institutions in GSK rose from 1.62 per cent in September 2008 to 11.58 by September 2013.
Again, domestic institutions were at the other end of the table.
During the same period, domestic mutual funds reduced their holding in the stock from 14.6 per cent to 0.16 per cent.
Similarly, retail investors remained sellers in the stock, bringing down their holding to 13 per cent currently from 16.97 per cent at the end of September 2008.
The GSK Consumer Healthcare stock has been a seven-bagger in the last five years, followed by stocks of Emami and Jyothi Labs, which rose five-fold.
Britannia Industries and P&G Hygiene saw their shares more than treble. Domestic investors missed the bus.
While FIIs held on to the FMCG names mentioned above, they managed to swiftly cut back exposure to underperforming stocks — Modern Dairies, Kohinoor Foods and Mount Everest.
The stock of Kohinoor Foods currently trades at a fourth of its closing price as on September 30, 2008.
Similarly, the stock of mineral water manufacturer, Mount Everest Mineral Water lost over 21 per cent in the last five years.
Consumer durables is yet another sector which saw meaningful investment from foreign investors.
Stocks such as Whirlpool India, Symphony, Bajaj Electricals and TTK Prestige were most fancied by foreign institutions in the last five years. TTK Prestige was the best performer in this space, witnessing a twenty-fold jump in stock price.
Similarly, Symphony’s stock price vaulted from around Rs 8 to Rs 305 in the last five years.
On the other hand, BPL, IFB Industries, Fedders Lloyd and Hitachi Home Appliances, among others, have seen marked decline in foreign institutional investment. BPL figured prominently in the losers’ list, currently quoting at a third of its price five years ago. Similarly, stock of Fedders Lloyd lost over 16 per cent during the same period.
In addition to increasing exposure to outperforming sectors, staying away from dicey sectors and stocks also worked well for foreign institutions.
They reduced exposure to stocks in the construction, airlines and education space which saw significant value erosion. For instance, FIIs reduced their holding in Patel Engineering from 8.24 per cent in September 2008 to 1.02 per cent now. The stock now quotes at a tenth of the price it traded five years back. FIIs completely offloaded holdings in Everonn Education, which has shed 90 per cent in the last five years.
Retail plays contrarian
But retail investors more than doubled their holding in the stock to 26.17 per cent. The stock now quotes at a tenth of the price it traded five years back. Retail investors increased their exposure to companies in the education and construction space.
Going by their stock returns, it was a pragmatic move by FIIs to cut down holding in stocks such as Marg, Patel Engineering, Unity Infra and Madhucon Projects, which slumped almost 80-90 per cent in the last five years.
Here, in a contrarian move, some mutual funds increased exposure to Marg and Ganesh Housing, which lost 65-90 per cent. Retail investors also followed suit and upped their exposure to these underperforming stocks. For instance, a big chunk of the 22.3 per cent holding in Marg sold by FIIs was picked up by retail investors. The retail holding in the stock stands at 26.2 per cent currently, up from 11.9 per cent at the end of September 2008.
FIIs have managed to make the most of the volatility in the last five years, which saw two short rallies interspersed with two corrective phases.
But are FIIs now changing course? There are signs of this in the last one year. Though they have steadily increased holding in defensive themes — pharma and IT — they have marginally reduced exposure to FMCG stocks in the last one year.
But again, going against the tide, domestic mutual funds and retail investors have actually pruned investments in pharma and IT in this period.
Other sectors where FIIs emerged buyers in the last one year include telecom, power and gems and jewellery.
In the telecom space, barring Bharti Airtel, they have been net buyers in other stocks — Tulip Telecom, Idea Cellular, Reliance Communications and Tata Telecom.
Healthy demand outlook and weakness in the stock price of quality telecom and power companies possibly attracted the attention of domestic institutions too, that concurred with FIIs and bought into these sectors.
So, what do FIIs own today? Currently banking and financial stocks constitute the biggest chunk of their investments, followed by IT, pharma, auto and FMCG.