How Institutions Play Their Game

Institutional Investors are the lifeline of capital markets across the globe. Atul Mehra, MD & Co-CEO, Investment Banking , JM Financial, Sampath Reddy, Chief Investment Officer (CIO), Bajaj Allianz Life Insurance,
Neelesh Surana, CIO, Mirae Asset Investment Managers and Rajat Jain, CIO, Principal Asset Management, explain the role of institutional investors in providing price discovery, stability and volatility to economies and an investment mechanism for retail investors, during an interview with Yagnesh Kansara. Edited excerpts:

What is the real role of institutional investors, given they are powerful because of their size?

Atul Mehra: With developments globally as well as in India, capital markets have become highly institutionalised.. Some of these institutional investors have achieved a size and scale that is larger than the economies of some countries hence they carry enormous weight and influence in the markets and their importance is only growing. They bring to the table, apart from their vast experience and expertise, patient long-term capital. They give huge importance to innovation, scale, quality of management team, sound corporate governance and historical performance of companies. Bulk of the money that these investors manage is directly or indirectly coming from retail investors either through their savings or pensions.

Sampath Reddy: Institutional investors, both foreign and domestic, help to bring professional investment management expertise/experience in the market place. Also, with larger fund allocations and assets under management they help to deepen and broaden the market, and thereby increase market penetration and liquidity. They are well-regulated entities, and help in greater transparency, in terms of various investment disclosures, in professionalism and corporate governance. With share of institutional investors, both FII and DII, increasing in Indian companies over the years, we have been seeing growing institutional investor activism, which was not much prevalent earlier in India, and they are starting to play a proactive role in corporate governance of Indian companies.

Neelesh Surana: They are well-backed by research team, and have well-defined processes both to identify opportunities as well as for maintenance coverage. Analysing businesses through sectoral analysts is the backbone of institutional investors. Given the system
and processes, they are better equipped to make informed long-term decisions.

Rajat Jain: Institutional investors bring depth in research to the markets, both fixed income and equity. Their presence improves the quality of disclosures and as they usually invest in a broad range of companies this improvement is widespread. Further, their intervention potentially leads to improving corporate governance as they engage with management of companies and push the minority shareholders’ point of view and actively vote on resolutions. In India, the debt markets are dominated by institutional investors while equity markets also have an overwhelming presence of these investors. Their presence and subsequent large participation in the trading provides liquidity to the market and lowers bid-ask spreads.

How are they beneficial to the retail investors?

Atul Mehra: Retail investors by participating through institutional investors can derive the benefits of collective bargaining power. With their thorough research, institutional investors can take long-term calls in the market. They can derive superior returns when compared to benchmark indices because of their long-term investments goals.

Sampath Reddy: Institutional investors work in a fiduciary capacity and can be entrusted with public funds, of retail investors, to be managed in a professional and research-oriented manner, with various risk controls in place. Some retail investors may not have access or have the necessary time or proficiency in conducting their own research for investing. Therefore, they can rely on investment management vehicles like mutual funds, insurance, pension funds for their investments to be managed in a professional manner and better investment stewardship. Also, with economies of scale, these investment vehicles can pass down lower cost of investing through lower expense ratios.

Neelesh Surana: The market “inefficiency” is generally reduced if there are more institutional investors. Extreme and irrational movement gets restricted with concept of benchmarking.

Rajat Jain: Retail investors can access the debt and equity markets through these institutional investors like mutual funds. Retail investors investing directly in equity and debt instruments may also benefit from the liquidity and price discovery provided by the active presence of institutional investors in these markets.

 What lessons should retail investors learn from institutional players?

Atul Mehra: Retail investors have a lot to learn from institutional investors. The first and foremost thing is how to cultivate patience to look at investments from a long-term perspective. They also need to learn about indulging in thorough and exhaustive research - in-depth research not only about the company they are investing in but also about the sector in which the company operates may help them to take informed decision. Retail investors can also benefit from the distinct feature of their institutional counterpart by keeping continuous and cautious track of their own investments. They should cultivate the habit of undertaking periodic review of their investments.

Once they have invested their money/funds, retail investors do not keep track of how their portfolio is performing. They should also focus on innovative products and keep on identifying new sectors and leaders across sectors, who can be supported in their growth journey.

Sampath Reddy: Institutional investors have a research-oriented process of investing, and typically the investment tenure and approach is long term in nature. Retail investors should try to develop a similar approach and have a longer investment horizon to help achieve their investment goals, rather than engaging in too much short-term trading activity that may prove to be counter-productive at times.

Neelesh Surana: Retail investors generally do not have time and resources to do in-depth research. The best learning for retail investors is to participate by giving money to professional institutional investors. In India, formats like mutual funds are very competitive and transparent.

yagnesh@outlookindia.com