While optically, foreign institutional investors (FIIs) have shown a better performance from 2018 to 2021, the domestic institutions have done spectacularly well on various fronts.
In recent times, everyone is discussing the rise of domestic equities flows through mutual funds (MFs). In fact, if you add insurance flows to it, then domestic MF, insurance and alternative investment funds (AIFs) have become a potent force in Indian capital markets.
This is one reason why FII importance is fizzling out as any selling in the equity market is getting absorbed without causing a major disruption.
In fact, a common question that was asked to all broking participants over the cups of tea was, “Gora log kya kar raha hai.”
They were perceived to be superior investors with global knowledge and expertise. Over years, Indian institutional investors have become savvier and better connected with more ears to the ground, thanks to the information explosion and maturing of the Indian sell side.
Almost every analyst can talk about the Chinese cost of production of steel and trading multiple SaaS (software as a service) stocks.
What does data tell us about investment performance?
IIFL Securities research team ran a screen of stocks with a market cap above ₹30 billion. The parameters we considered were stocks that had the following attributes:
1. FII owned more than 15 percent but MFs own less than 5 percent.
2. MFs owned more than 15 percent but FII owned less than 5 percent.
We compared the returns from 2018, 2019, 2020, and 2021 to date and interesting trends emerged.
1. Optically, FII performance appeared better. On deep dive, it was caused by a single group. Since FII entities were the largest holders of Adani group of stocks and these rallied 30-50 times, FII returns look optically much higher.
2. For example, FII-owned stocks rallied on an average of 210 percent since 2018 but if one removes the Adani group of stocks, returns fall to nearly 40 percent.
3. Below is a table of average returns after removing Adani Group.
4. Based on this, MF stocks have rallied 2-3 times the FII basket.
5. More importantly, not a single MF stock delivered a negative return since any of the starting periods. The lowest stock return was 9 percent.
6. FIIs have a mixed ratio. 14 out of their 58 stocks have delivered negative returns from 2018. Some of them have collapsed and lost 80 percent plus. ADAG Group has been a big contributor to the fall.
7. Key FII winners include names like JSW Steel, and Jindal Stainless and blue chips like Asian Paints. Reliance, of course, has been a part of the notable gains in some years.
8. Key domestic winners were Kirloskar Pneumatic, Grindwell Norton, Honeywell, Solar Industries and Indian Hotels among others.
9. It appears that domestic MFs are better at catching mid and smallcap ideas.
10. FIIs are restricted to stocks where they can invest due to market cap criteria and hence lose out on many emerging ideas. Maybe, analysis of returns based on the market cap may throw a different set of numbers.
11. As of now, over tea, in some cases green tea maybe, the retail investor is better off asking, what the domestic MF is doing rather than what the Gora is.
(The author of this article is the Chairman of IIFL Securities)
Disclaimer: The views and recommendations given in this article are those of the author. These do not represent the views of MintGenie.
