Are FIIs buying the same stocks as MFs?

Equity markets have been volatile so far this year with Nifty 50 falling about 10% in the Jan-Mar period and recovering swiftly to make new highs. But broader markets are still losing with Nifty Midcap 100 down 10% and BSE Small cap down 13% while Nifty 50 has returned 8.5% in the year to date. So how are foreign institutional investors (FII) and mutual funds playing this market?

FIIs have been net sellers this year, selling Rs.37,583 crore while mutual funds have made net investments of Rs.69,471 crore. This divergence between FIIs and mutual funds is not just in the overall numbers. They differ vastly in their stock picks as well.

Larger or smaller companies?

With large-caps and small-caps taking different directions, the choice between them has become even tougher. Mutual funds have settled with taking the cautious approach of sticking to quality large-caps. They have, in fact, been pruning their exposure to small-caps. If we look at all funds which can invest across market capitalisations, exposure to mid and small caps has reduced from 36% in January to 30% in June. The share of large-cap stocks has increased from 58% to 63% in the same period. Here, the definition of market cap segments is as per SEBI.

In this same period, given that FIIs have been heavy sellers, large-cap stocks have seen FIIs reduce stake in more stocks and increased stake in just a few. MFs have increased stake in 70 large-cap stocks while they have reduced it in 27 of them. FIIs increased stake in just 37 stocks and reduced stake in 62.

Even within the limited number of large-cap stocks where FIIs increased stake, the choice of stocks differ from MFs. In Asian Paints, for example, FIIs now hold 14.7% against a nil holding in January. Mutual funds have just have stayed put with around a 2% stake. Similarly, in Interglobe Aviation FIIs increased holding by 3 percentage points while mutual funds reduced their holding to the same extent. The same holds true for Adani Ports, where FIIs upped stake and mutual funds did the reverse.

One trend in mutual fund buying is that they have increased stake in stocks that saw a steep fall in prices during this period. Some of these include Idea Cellular which fell 45% (increase of 4.8 percentage points), Bharat Petroleum Corporation Ltd which fell 28% (increase of 3.5 percentage points) and Tata Motors which fell 38% (increase of 1.9 percentage points). Contrarily, all of these stocks saw a decrease in stake by FIIs.

In small-cap stocks, however, FIIs seem to have found more buying opportunities. A larger proportion of stocks in this universe has seen FII stake increases than the mid-cap or large-cap universe. In Fortis Heathcare, for example, FII shareholding rose to 52% in June 2018 compared to 30% in January. In Team Lease Services, FIIs upped stake to 40% by June against the 26% in January. They now hold between 40% and 50% in 7 small cap stocks while the highest stake mutual funds have in any small-cap stock  is 37%.

Sectoral deviation

Marketcaps aside, even within sectors, FIIs and mutual funds take different paths.

Consider the telecom sector. Mutual funds have upped stake in both Idea Cellular and Bharti Airtel. FIIs have not, but instead chosen Tata Communications to hike holding.

FIIs also seemed to find opportunities in healthcare stocks Fortis Healthcare and Dr.Lal Pathlabs where mutual funds decreased. Funds picked up the beleaguered Dr Reddy and Sun Pharma while FIIs preferred Divis Labs.

In software, another major sector, FIIs went heavily for stocks such as Mindtree and KPIT Technologies, which mutual funds stayed away from. Significant increases by mutual funds were instead in Infosys and Wipro, which FIIs ignored.