Inside Track

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Saumil SharmaInstanex gives investors a chance to track the FIIs that control the markets, says Saumil Sharma

CONVENTIONALLY, WHILE making investment decisions, investors look at the market valuation of companies registered on the stock markets. These valuations are based on the stock issuing company’s performance over a period of time. Till date, financial market indices like S&P CNXNIFTY or BSE tend to be driven by volumes of investment in certain equity issues. So, the common investor has to toil to invest in multiple high growth and profitable companies rather than being able to share a consolidated equity base chosen by highly qualified investors making successful investments in the markets.

New track Retail investors will now easily monitor FII investments in India
New track Retail investors will now easily monitor FII investments in India
Photo: Shailendra Pandey

No longer. Instanex, a specialised investment firm, launched the Instanex FII Index, which tracks the price and performance of the portfolio of listed Indian equity shares owned by such a particular class of investors – Foreign Institutional Investors (FIIs). This innovative market tool is the first of its kind as it is the only index in the world based on quarterly adjusted market capitalisation (FII share holdings) of an investor group or class.

“We feel that the Instanex FII Index would be extremely popular with investors as well as with exchange participants and their clients because it is highly correlated to FII flows and will permit investors to take a position more closely linked to FII flows than the Nifty Index”, says Instanex Capital Consultants CEO Gautam Chand.

Chand says that Instanex Owner Indices slice the market by investor class rather than the traditional system of market capitalisation or sector. This allows Instanex to observe the investment behavior of different investor classes within the overall market.

“Our interest in this Index is due to its representation of the Indian market — with a diversified access to equity investments — done by a largely successful investing class of Foreign Investment Funds. In essence this Index is very beneficial because it combines the benefits of fundamentally sound equity options with the investment choices made by the best investment companies which have many creative minds working behind their investments” , says Bruno del Ama, CEO, Global X Management Company LLC

Effectively, this index will enable other investors in the country to replicate the FIIs — the largest institutional investors in Indian markets, with holdings valued at close to $90 billion on May 11, 2009. They account for over three times the value of buy and sell orders on stock exchanges compared to domestic institutional investors. More important, FIIs determine the direction of the market. They are the most successful portfolio investors in India, with 157 percent appreciation since September 30, 2003.

India is attractive to FIIs due to the steady growth its economy had registered

“The advantage of investing in the Instanex FII Index is the higher returns in medium-long term compared to the market. History supports the proposition that the superior performance of the FII index over the market will be sustained”, adds del Ama.

Over the past two months FIIs have changed the direction of the Indian markets. On March 5, the Instanex FII Index touched its 2009 low of 184.20, down 16.55 percent for the year. Immediately after that, the index recovered sharply, clearly indicating that FIIs had drastically reduced their selling.

GB Bajaj, a strategist, argues that the Instanex FII index is expected to bring about a major change in the way FIIs and domestic investors strategise and plan their equity holdings in Indian markets because of the transparency it brings into the system in terms closely analysing FII equity investment data through SEBI’s provision of information disclosure.

“The FII index is based on active rather than passive investment management compared to broad-based indices, and is very specific to the Indian financial market context where FIIs have outperformed other market investors in the long run. With the time and money that these large foreign institutional investors put into research on the Indian markets their investment decisions are more often right and outperform the regular market indices”, says Jerry Moskowitz, MD of FTSE Americas.

“Sentiment drives short-term investments, whereas long-term investment is based on the fundamentals of companies and the economy” says Gautam, while commenting on the 36.62% rise in the Instanex FII index since 06 March 2009. He also says that financial markets in India are liquidity-driven where speculators front run the market on future expected FII orders and hope to sell dear to the FIIs. In short, it means fresh FII inflows supporting the index rise.

FII are always buying or selling but what makes this index workable? Instanex’s findings show that over 1,500 registered FII that manage 5,000 accounts have shown largely homogenous choices of stocks and are consistent in their stock selection over the past five years.

Very specific to the context of Indian markets, it is noteworthy that FIIs have broadly similar investment patterns which enabled Instanex to create such an index, which might not be true for any other market. “In my opinion there exists no other such index or such a trend in any other market to form a dynamic index based on particular investor class behaviour”, adds del Ama.

Moskowitz responds by saying “FIIs investing in India buy and sell the same securities and if the market as a whole starts to follow similar investments then FIIs may face falling returns on their investment choices, resulting in change of investment strategies. However, this would need a fundamental shift in the investment patterns of FIIs, changing the regular type of compensation and restructuring the tracking of markets”

IT’S NOT a given that the Instanex FII index will always outperform the broad base indices, argues Moskowitz, adding that markets in the US and Europe have never proved any such trends and more often than not retail investors have outperformed institutional investors in these markets. “In case of Indian markets the underlying assumption is that institutions like pension funds consistently make the right decisions using the research depth they can achieve into the market”, adds Moskowitz

Experts show mild concern that policy or regulatory changes in the long run may affect the fortunes of the Instanex FII index but such cases would arise only if the FIIs choose to play a different ball game altogether. The dynamism of this index due to its self-adjusting quarterly cycle will allow it to closely follow the sectorial shifts in foreign investment in equity markets.

With optimism, Girish Bajaj comments that “the future of this index is bright and it shall become extremely popular with introduction of ETFs and other by-products like options and futures. Importantly, it shall provide a good indicator of the direction in which the market is expected to move, challenging the existing tactical strategy of various investor groups”. Overall, the introduction of the new index seems to be promising for domestic investors in the current times.

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