Institutional investors too prone to picking losers

It is not just retail investors who pick losers. Institutional investors too are so prone! Or, so it would seem.

Usual suspect

An analysis of 50 companies that raised money through private placements with institutional investors, or through qualified institutional placements (QIP), since January 2010 shows that 72 per cent of these stocks are trading below the price at which institutions bought into their shares. Two-thirds of these stocks have under-performed the broader market index (CNX 500 Index) too. Nearly half of QIP stocks have incurred losses in excess of 20 per cent. Stocks such as Parsvnath Developers, Ansal Properties, Jubilant Organosys and Aksh Optofibre are trading well below half the issue price. The most severely affected sector is the usual suspect — real estate.

Collectively, such institutional investors have seen their portfolio suffer, as on date, a 27 per cent (annualised) erosion in value of their original investment. In contrast, the CNX 500 Index (a broad measure of the market performance) has suffered only a 10 per cent loss an indication that a proactive approach of selecting stocks did not work for the institutional investors.

Stock picking by institutional investors in 2009 did not fare any better, as only one-third of the companies in which they picked up stocks are trading at a level above the issue price.

Bitten twice

While the poor performance in 2009 is understandable, as the majority of such cases were in the real estate sector, which continues to struggle, the cases backed by them in 2010 had a wider focus. But results have been just as disappointing. According to the data compiled by Bloomberg, companies raised around Rs 60,000 crore from institutional investors during the last two years.

Regulations of the Securities and Exchange Board of India prohibit companies from issuing shares at a discount to the prevailing market prices (two week's average or a six-monthly average whichever is higher). In the event, an investor availing of a preferential allotment of shares has to be certain that the current market price is justified by company fundamentals. The sample cases analysed reveal a mismatch between intrinsic worth and market-price based determination of issue price. Retail investors riding piggy back on institutional investors' decisions in the hope that such an approach would fetch better returns thus run an added risk.

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