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What in the world
is an institutional investor?
By Ken
Kurson • Bankrate.com
When you buy a stock, you're a "retail investor."
When someone with a ton of money -- an insurance company, investment
company or pension fund -- buys a stock, they're an "institutional
investor." Because they trade large quantities and are presumed
to be run by knowledgeable pros, institutional investors typically
receive preferential treatment, and face lower fees and fewer restrictions
on the kinds of investments they can buy.
Fidelity Investments, with $996 billion to spend,
is the largest institutional investor in the country. And the less
known institutions aren't all that less wealthy. TIAA-CREF, for
example, provides teachers with many financial services, including
Retirement Plans (IRAs and Keoghs), Mutual Funds, Personal Annuities,
Life Insurance and more. With $290 billion in assets under management,
TIAA-CREF (which stands for Teachers Insurance and Annuity Association
-- College Retirement Equities Fund) represents one time when it
doesn't pay to ignore the teacher.
Moves made by the big money often affect you, the
individual investor. Because these behemoths are so large, they
cannot enter or exit positions gracefully. As a result, big trades
by an institution can send your stock tumbling. So it pays to know
what the institutions are up to.
So how do you find out what the institutional investors
are doing? My favorite site for tracking the big money is Multex's
MarketGuide. Just enter a ticker and click "Instit. Ownership"
on the left side, and you'll be greeted with a wealth of information
on the wealthy's information.
Example: I entered "VLNC" to learn more about
the institutional ownership of Valence Technology Inc. (Nasdaq:
VLNC), an advanced battery
company whose stock I've occasionally smooched. Marketguide tells
me that 29.1 percent of VLNC's shares are owned by 88 different
institutions. Capital Guardian Trust, VLNC's largest investor, holds
2,353,333 shares, and other big names such as mutual fund families
Vanguard and Founders, banks like Solomon Smith Barney and pension
funds like Commonwealth of Pennsylvania Public School Employee and
Texas Teachers Retirement System also own shares.
You can also learn which institutions made large changes
in their positions. Looking again at VLNC, one sees that Wellington
Management, which had no shares, bought 867,400 as of June 30, 2000.
The Teachers Retirement System of Kentucky, on the other hand, liquidated
all of its 144,200 shares, on or before Sept. 30, 2000. What these
charts don't tell you is WHY these institutional investors made
the buys and sells they did -- only their portfolio managers know
for sure.
Even without knowing why someone bought or sold, it
still pays to know who holds what. Let's say you have most of your
dough invested in Fidelity stock funds. You're considering adding
an individual stock or two to your portfolio, both for the fun of
educating yourself about following stocks, but also for diversity's
sake. Should you discover that Fidelity is the biggest institutional
shareholder in the stock you plan to buy, you might not be getting
the diversity you thought you were.
Institutional investing info can also be used to suss
out stocks that might soon be in trouble. Here's how. Mutual fund
companies tend to invest in similar stocks across the whole family
-- Philip Morris (NYSE: MO),
for example, might show up in a dozen different Fidelity funds.
That's because the many funds often share the same research staff,
and if that staff likes MO for one fund, it probably likes it for
others. For this reason and others -- including the fact that funds
in the same family share the same marketing and back office staffs
-- entire fund companies often tend to rise and fall in synch. For
example, the fund family PBHG had an awful year in 1998, which affected
almost all its funds.
So what's this mean to individual investors looking
at institutional ownership? Well, mutual fund managers don't control
the amount of money they have to invest. If shareholders are redeeming,
fund managers have to sell stock to raise that money. That can bode
ill for shares of stock in which the fund company is a large institutional
investor. Say you were considering buying XYZ. You look at MarketGuide
and discover that Mutual Fund company ABC is XYZ's biggest shareholder.
You see that ABC hasn't sold any recently but you've been hearing
that the fund company is having a rough year. Once the funds start
experiencing what's known as "net redemptions" -- value of existing
mutual fund shares sold is greater than the value of new shares
bought -- it's a good bet the company will start paring its largest
positions. If that includes the XYZ stock you were planning to buy,
you could wind up with a loser on your hands.
Other sources for info on Institutional Investors
can be had by the bible of that industry, not surprisingly called
Institutional Investor magazine.
Every April, II runs a very influential all-star list of the best
brokerage analysts in each sector.
You might also want to check the SEC filings of mutual
funds, which file quarterly portfolio reports (form 13-F). And all
investors, institutional or not must also must report when their
stake in a company exceeds 5 percent (form 13-D).
Finally, there are several newsletters that focus
on the trades of a particular institution.
-- Posted: Nov. 15, 2000
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