Published Article Details

Why we need to worry when institutional investors behave like uninformed traders

Posted by: Uma Shashikant on Jun 04, 2018, 06.30 AM IST

The fault finding and finger pointing in the Manpasand Beverages case have hit a crescendo. Everyone seems to know what was wrong with the stock; and every fund manager who has it in the portfolio has been hung out to dry. The only hero in the saga is Amit Mantri, whose incisive blog post of 2016 is so much in the spotlight now that the website crashed under the weight of unexpectedly high activity. Why do such stories recur?

We love the rags to riches theme. Equity investing for many investors, both individual and institutional, is about discovering the next big multibagger and making tons of money off it. There is only one time-tested method of doing that; it is a meticulous and intensive approach called value investing. 

However, not everyone has the patience for research and identifying stocks that they are convinced are undervalued, while waiting for prices to respond. A value investor buys a stock worth Rs 100 for Rs 50 and hopes to sell when prices move up. But a value stock can remain unnoticed for a long time, and the price could move down to Rs 30 in the meanwhile. A true blue value investor will acquire more. 
But then, the retail investor is unable to do this because of behavioural limitations. Social approval is important to the lonely investor who is searching for value, and except for a few dedicated loners who hold on to their beliefs, the others are disappointed when the stock fails to perform. 

Institutional investors are no exceptions. While they can afford high quality research, field visits and due diligence, and pursue strategies that enable them to identify and accumulate value picks, they operate too much in the public eye to afford the lack of price appreciation. A fund manager who holds a high conviction value pick will not be able to consistently explain the fall in price of the stock and the drain on the portfolio’s value. We don’t trust such justifications either, when stock .. 

Enter momentum. Stock picking by most investors relies not on fundamental research, or intensive search for value, but on mere price action. It is somewhat reckless and short-sighted, but yields immediate results. A momentum investor who picks up a stock at Rs 100 does not care if it is overvalued or undervalued, as long as it appreciates and can be sold at Rs 150. 

The proliferation of television shows that discuss stocks; the obsession about tickers and updates; the thirst for names in most online chat forums; the deterioration of most conversations about stocks to buying tips; and the surge in trading volumes around rising stocks are all the outcome of the overt focus on momentum investing. 

The problem is not in the strategy itself, but its masquerading as if the stocks in question are potential cases of undiscovered value. This is endemic in the Indian markets, where entrepreneurship is cherished and encouraged by even the simplest of beginners in equity investing. Every IPO is exalted as the next big thing, and if it opens with a premium to issue price, investors laud themselves to have participated in the next big multi-bagger. 

Momentum enables small investors to celebrate quick victories, and helps fund managers to stay above water as their portfolios appreciate with the prices. It is not uncommon for investors in mutual funds to highlight the stock picks of fund managers that have shown the highest momentum, and make it a talking point. There have been funds run by erstwhile star managers that moved up purely by momentum, only to crash and disappear as prices corrected. While the play was on, the said fund manager, who later quit the fund, was celebrated as a top value investor who identified unknown pearls. It is just that we are not discerning enough to see the difference between momentum and value, and fall into the trap too often. 

That is how stocks like Manpasand Beverages and Vakrangee Ltd jump up even when their fundamentals are questionable. It is striking that the research note put out by Mantri is now being appreciated and celebrated, while it remained unnoticed in public domain until the dramatic exit of the auditors. Fundamental research is stamped out by price runs, and as long as the stock is moving up, every naysayer’s concerns are brushed aside. When price falls, or when what we call a trigger event happens, all research that supports and explains the now exposed stock come into limelight. When we care more about price action, than about intrinsic value, we are not value investors by a long stretch. 

There is valid concern that institutional investors who should have done fundamental research, failed to see the shortcomings of the stocks that have now lost so much in price. These are the perils of short termism, which is also a disguised phenomenon. For all the talk of long-term investing, NAV is a daily number and most funds won’t get more than two quarters of time to correct their rankings in the league table. 

Investors in mutual funds also chase momentum, by looking at past winning funds. There is evidence to show how performing funds attract the most new money and how investors and distributors highlight immediate past performance as an important metric. Therefore, appreciating NAV, and rank in the top quartile of the league are essential to keep the money flowing in. It is unthinkable how this can tie neatly with value investing as a strategy. 

Fund managers would therefore follow a mixed approach – a few stocks for value, a few for growth, and a few for momentum. This not only provides a shot at consistent performance, but also reduces the overall risk due to diversification benefits. Now that these falling stocks are in the news, there is animated discussion about funds that hold these stocks. There would then be justifications and eventual paring down of the losing stocks. 

That would not, however, absolve institutional investors fully. Due diligence is a responsibility that institutional investors such as portfolio managers and mutual funds must bear. To know, verify and own up to each name in the portfolio is something we expect from professional investors. Instances like Manpasand and Vakrangee show up the shortfalls in that trust. If investors with expertise, access to research, and strength of size behave noisy and uninformed traders, we have reasons to worry. 




Online Courses

Capital Markets
Basic Level
BANKING AND CAPITAL MARKETS

Get the training you need to work in the Banking and Capital Markets industry through this intensive course

Capital Markets
Basic Level
SECURITIES AND OPERATIONS PREPARATORY

This NISM preparatory training is designed to help students whowant to take the securities and operation ex

Capital Markets
Basic Level
DEBT INSTRUMENTS - BASICS

Get a complete understanding of debt instruments in India. This course is ideal for professionals who want

Capital Markets
Basic Level
EQUITY MARKETS BASICS

More people in India are investing in equities and shares creating a need for more skilled equity managers

Capital Markets
Advance Level
EQUITY LINKED STRUCTURED PRODUCTS

Structured products are used to introduce tailor-made investment options in the world of finance. Our cours

Capital Markets
Advance Level
DEBT INDICATORS

What factors affect the debt market? Learn all about debt market indicators to understand the world o

Capital Markets
Advance Level
DEBT MARKET ANALYTICS

Need help to understand the bond market? This bond valuation course simplifies debt bonds, bond yield

Capital Markets
Intermediate Level
CREDIT RATING

Poor credit ratings indicate risky investment opportunities. Learn about the concept of credit rating, its

Capital Markets
Advance Level
EQUITY VALUATION PRINICIPLES

Learn the different principles of equity valuation along with their real world applications.

Capital Markets
Advance Level
EQUITY MARKET INDICATORS

Reinforce your stock market basics by learning about equity market indicators through our online course.

Capital Markets
Advance Level
DEBT MARKETS LEVEL - 2

Understand the structure of debt capital markets and the structure of its primary and secondary markets.

Capital Markets
Advance Level
EQUITY MARKETS -II

Learn advanced methods of fundamental and technical analyses of financial statements in capital markets.

Mutual Funds
Intermediate Level
TAXATION ASPECTS FOR MUTUAL FUNDS

People in India are becoming increasingly savvy about the investment options available to them. Mutual Fund

Mutual Funds
Basic Level
MUTUAL FUND PRODUCT PRIMER

People in India are increasingly knowledgeable about the investment options available to them. Mutual Funds

Mutual Funds
Intermediate Level
MUTUAL FUND FACTSHEETS

Become a mutual fund investment advisor. This course will teach you the basics of mutual fund investment th

Mutual Funds
Basic Level
PREPARATORY COURSE FOR NISM MFD EXAM

This NISM modules preparation training is designed to help students who want to take the NISM examinations

Mutual Funds
Basic Level
MUTUAL FUND PROCESS PRIMER

Acquire the ability to provide complete financial solutions to investors using mutual funds through underst

Mutual Funds
Advance Level
PERFORMANCE EVALUATION OF EQUITY FUNDS

Learn to evaluate a portfolio thoroughly through our advanced level course on portfolio evaluation!

Mutual Funds
Intermediate Level
EQUITY FUNDS - PRODUCTS AND POSITIONING

Learn about the different types of equity funds and their positioning through ourintermediate level course.

Mutual Funds
Intermediate Level
DEBT FUNDS - PRODUCTS AND POSITIONING

Learn about the types of debt funds and their positioning through our intermediate level online course.

Mutual Funds
Advance Level
MUTUAL FUND PRODUCT POSITIONING

Learn how to choose and understand mutual funds products with our online course on mutual fund positioning.

Mutual Funds
Advance Level
DEBT FUNDS - RISK, RETURNS AND PERFORMANCE

Learn to market debt funds and how to calculate their risks and returns through our advance level course.

Mutual Funds
Advance Level
FUND SELECTION AND SUITABILITY

Learn to choose the right category mutual funds based on your clients' risk profile and financial needs.

Mutual Funds
Intermediate Level
LIQUID FUNDS AND TREASURY MANAGEMENT

Learn how to invest in liquid funds for treasury management through our advanced online course. Enrol now!<

Stock Broking
Intermediate Level
DERIVATIVE TRADING-2

Master the basics of option trading strategies and learn how to balance profits, risks and returns us

Stock Broking
Intermediate Level
EQUITY TRADING - 2

Delve into the nuances of equity trading strategies. Hone your skills to gain maximum rewards through this

Stock Broking
Basic Level
TRADING ACCOUNT - COMPLIANCE

Understand the consumer redressal procedures used by broking houses, their clearance and settlement process

Stock Broking
Basic Level
TRADING ACCOUNT - LEVELS - BASIC CONCEPTS

Get started with the basics! Learn how trading and DEMAT accounts are different along with their opening an

Stock Broking
Basic Level
DERIVATIVE TRADING

Get the tools and knowledge you need to understand derivative products. Learn about the pricing of differen

Stock Broking
Intermediate Level
MARGIN LENDING AND TRADING

Margin trading and lending is a high risk and return strategy. Learn how it works from our online course.

Stock Broking
Basic Level
DEMAT ACCOUNTS - PROCESS

Learn how to open and operate DEMAT accounts through our beginner level online course.

Stock Broking
Basic Level
EQUITY TRADING - 1

Learn the concepts of equity trading and trading strategies through our beginner level online course.

Stock Broking
Advance Level
DERIVATIVE STRATEGIES

Gain a thorough understanding of the best options trading strategies through our advanced online course.

Stock Broking
Intermediate Level
IPO AND MARGIN FUNDING

Understand the IPO funding process in India and their benefits to investors through our intermediate course

Stock Broking
Intermediate Level
LAS, IPO FUNDING & LEVERAGE

Learn about IPO, ESOP financing structures along with loans against securities through our online course.