As a class, they now prefer blue-chips over small-caps, invest more in defensive sectors such as FMCG and pharma and actually buy shares when the chips are down.
They punt on penny stocks, jump in and out of the market at just the wrong times and don’t know an ITC from a GTL. If that is the impression of retail investors that many of us carry, it is time to change it.
Analysis of retail behaviour in the NSE-listed stocks reveals that small investors are getting smarter and savvier in their market moves.
Retail investors, as a class, now prefer blue-chips over small-caps, invest more in defensive sectors such as FMCG and pharma and actually buy shares when the chips are down.
To arrive at these findings, we used shareholding patterns of retail investors over a three-year period, juxtaposed with the market cap of 1,200 NSE-listed companies.
Here is the story with the numbers.
Fact # 1: Retail investors prefer blue-chips to small-caps
Retail investors love penny stocks. They would rather bet on a Subex Systems than on an Infosys. If you believed that, it isn’t true anymore.
Indian retail investors have made a drastic shift in their portfolio in the last three years, away from small and mid-cap stocks and into India Inc’s marquee names.
Latest shareholding data (June 2012) shows that a whopping 72 per cent of all the retail money invested in NSE-listed stocks is parked in stable large-caps today.
Large-caps are stocks with a market capitalisation of over Rs 10,000 crore. Only 13.5 per cent of retail money is deployed in small-cap stocks (market cap of Rs 2,500 crore or below).
If you had checked on the same numbers three years ago, the picture would have been quite different. Just after the market crash, in March 2009, nearly 25 per cent of the retail money was invested in small-caps and another 19 per cent languished in mid-cap stocks. Blue-chips accounted just over half of the retail portfolio then.
That retail investors, as a class, have migrated to quality stocks is heartening. With their portfolios hitched to more established businesses, they are likely to enjoy a smoother ride than before, if the stock market decides to do its yo-yo act.
In fact, if you take stock of all the retail investments in NSE-listed companies at current market value, the top stocks, by market value, in this ‘portfolio’ are Reliance Industries, L&T, ITC, Infosys and Hindustan Zinc — names that any fund manager in the country wouldn’t mind owning.
These five stocks now account for a fifth of all the retail money invested in Indian markets.
Fact # 2: They don’t chase the flavour of the month
Banks, FMCGs, software and metals — theseare the sectors that seem to be retail favourites at the moment. Small investors also have more money invested in sectors such as FMCG, pharma and automobiles, not much affected by economic cycles, than the FIIs or domestic institutions.
However, it is worth noting here that small investors have not made a beeline for FMCG or pharma stocks because they are the flavour of the season. They had allocated about 15 per cent of their portfolio to these sectors way back in March 2009 and gradually raised this to about 16 per cent by June 2012.
Small investors have also pegged up holdings in bank and metal stocks, despite their being out of favour.
Small shareholders as a class also own a far more diversified portfolio than domestic mutual funds or foreign institutions.
Banks/finance, FMCG and software, the top three sectors where retail money was invested in June 2012, made up only 37 per cent of the retail ‘portfolio’. In contrast, FIIs put nearly 50 per cent of their aggregate funds in the top three sectors.
Fact # 3: Retail investors don’t buy high and sell low
“When the shoe-shine boy on Dalal Street begins to get in, it is time for you to get out”. Stories like this reinforce the perception that retail investors jump on to the bandwagon when stock prices are soaring and shun equities like the plague when they are down.
But actual evidence from the markets in the last three years suggests no such thing.
Between March 2009 and November 2010, when markets steadily rose, retail investors actively offloaded their holdings. They cut stakes in 54 per cent of NSE-listed stocks.
Dhanlaxmi Bank, Lumax Auto, TVS Motors — these are select stocks where retail investors pruned stakes by between 5 and 13 percentage points in 2009-10 as they delivered manifold returns.
When stock prices began to tank from end 2010, retail investors went into accumulation mode, buying into 56 per cent of the listed stocks.
In the 2012 market rally, retail holdings have again been pruned in front-runners, whether it was mid-cap names such as Shanthi Gears and Wheels India or large-cap ones such as Hindustan Unilever and Reliance Power.
The ‘stickiness’ of the retail investor is even better captured by data on the overall level of retail holdings in the stock market.
Retail investors owned 8.4 per cent of the total market cap on the NSE in March 2009. This inched up to just 8.7 per cent by end 2010, after markets vaulted over a 100 per cent. As the index went into a tailspin, surprisingly, retail holdings rose even further.
These numbers are hardly suggestive of retail investors, en masse, jumping into or out of the markets, whenever it changes direction.
Fact # 4: Retail investors did make money
A final myth about retail investors is that they seldom make money. Owing to timing their moves all wrong and selecting the wrong kind of stocks, they are said to miss the bus in a market rally and suffer agonies when the market tanks.
But that’s not true either. The portfolio of retail investors may not have raced ahead of the market during bull phases.
But it sure has contained losses well during a market crash.
To gauge this, we constructed an index of the top 50 stocks in which retail investors had deployed the most money at different points in time. We arrived at the top 50 by multiplying the retail shareholding with the stock’s market value at each date.
This index (let’s call it the Retail 50), vaulted by 133 per cent, a few paces behind the Nifty, in the raging bull market between March 2009 and November 2010.
As the Nifty nosedived by 27 per cent over the next one year, the Retail 50 contained losses at a lower 23 per cent. As the Nifty took off again in 2012, rising 23 per cent, the Retail 50 was right with it, gaining 21 per cent.
Given that only half the professionally managed equity funds have managed to outpace the Nifty over this three-year period, that’s a splendid show for the ‘uninformed’ retail investor. Isn’t it?