Honing In On Holdings

Irrespective of your profession, chances are good that you keep a close track of what experts and professionals of your field are up to. This cannot be truer than in the investing world that has more than its share of experts. Foreign institutional investors (FIIs) and domestic institutional investors (DIIs) are couple of them and their holdings are closely followed. After all, these portfolio managers have access not only to the best minds and stock influencing data, but also to CXOs of companies. It is assumed that all this gives them an edge over other investors in selecting and investing in the right stocks. Hence, it makes sense to invest in those stocks where smart money has moved in. 

This becomes even more important in the current scenario when we are staring at an imminent hike in the interest rate by US Fed in its December meeting. The last time the US Fed raised the rate was in the year 2006. The rate hike will have negative consequences on our currency as well as FIIs flows, which may lead to capital outflows from the emerging markets as well as India. In 2015 (year till date, November 25) alone we have seen Rs 22,000 crore of FIIs inflow into Indian equities. We have seen in earlier instances that when FIIs move out of the Indian equity enmasse they create panic and lead to a fall in equity prices, and this time it may not be different.

In addition to the FIIs, DIIs remain the other dominant institution whose buying and selling is supposed to impact the movement of share prices of the companies. In the last 18 months we have seen that DIIs, including mutual funds and other financial institutions, have continuously increased their share of investment in Indian equities. Investors like you would definitely be interested in the names of companies or sectors where these institutional investors are increasing their stake. But before that we will try to find out if there is any correlation between inflows from FIIs or DIIs to the stock price and secondly, which are the companies and sectors they are currently bullish or bearish on.

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To know the impact (if any) of such outflows or inflows on share prices of companies, we studied the change in share prices with respect to movement of FIIs’ holding in that company. We assumed that the impact of the increase or decrease in holdings will impact the price in the same quarter as actual buying and selling has happened during that period only. Our study period was for the six quarters ending June 2014. We started with 4,247 companies and excluded all the companies where there was no holding of either FIIs or DIIs in our study period. Almost 1,650 companies were dropped at this stage. Later, we scrutinized the companies for their consistency in filing the shareholding pattern. Many companies were left out at this stage due to their inconsistency in filing their shareholding pattern to exchanges. At the end, we are left with 2,000 actively traded companies where there was institutional interest in the last six quarters.

Number Crunching

First of all we tried to study if there is impact of FIIs inflow or outflow on the share prices of the company. For this we ran a regression on the change in share prices to change in holdings. The result shows that there is indeed a positive relation between change in FIIs holding and share price movement and it is statistically significant. However, the impact or the movement that is explained by the change in holdings of FIIs is minuscule and only 0.5 per cent of the total change in share price is explained by FIIs’ inflows or outflows.

When we did the same exercise with change in DIIs holding to the change in share price, the results were surprising. The simple correlation between the above two is negative (no typo error). Nonetheless, when we regressed the data of change in holdings to change in price, we found that there does not exist any statistical significance relation between these two.

Conclusion

The above study shows that only FIIs entering and exiting any stock influence their prices while DIIs do not play any significant role in the price movement of shares they are buying or selling. Intuitively it can be explained as institutional investors do apply different strategies and algorithms to minimise the impact on the share prices of company they are either increasing or decreasing their exposure to. Moreover, they are long-term investors. Hence, the impact on share price is not visible in the same quarter and we may see a lag impact of institutional activity on share prices.

Therefore, please watch this space for our further study on how change in holdings impact the share price with lag effect and how the consistent increase in the institutional holding impact the share price. If you want to know some other relation too you can always write to me at shashikant@dsij.in, which we will definitely consider in our future study. Those readers who are interested in knowing the companies where FIIs and DIIs have consistently increased their holdings in the last five quarters can refer to the table presented herewith.