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Institutional vs Retail Investors; how far will the sky fall?


What is an institutional and a retail investor, and is this important? Institutional investors, in simple terms, are outfits that charge money to others in fees for their services and products. Institutional investors are basically large institutions employing money managers and brokers who consistently market, buy, and sell financial instruments (stocks, bonds, etc) in an effort to meet various product or portfolio goals. These insititutions fall broadly into categories of banks, mutual fund companies, pension boards, brokerages, and other private equity firms. Many of them have a suite of their own funds, holding many, many stocks and/or bonds in mixes to achieve those goals. Within these institutions they may also employ financial advisors and portfolio managers, who will help you devise your financial plans and take part in their execution.

  These large institutions include the likes of “Investors Group, Assante, World Financial Group, Omers, Raymond James, Morgan Stanley, and Edward Jones, to name a few common ones in Canada. Also, insurance companies and banks are breaking into the institutional investment industry with all the major banks and insurance companies in Canada now offering institutional products and support. Institutional investors also includes Blackrock, Vanguard, Hamilton, and a number of other low-fee financial insitutions producing and managing their own suite of funds that trade on the stock exchanges around the world. They also include various pension boards, and very large pension funds under their management. These pension funds in Canada amount to a ton of sovereign investment. All these players take passive to active trading approaches to their products.

   A retail investor, simply, is someone working alone who invests in products through discount brokerages, and manages their own portfolio. They generally do this with minimal to no fees and are not recognized as “professionals”. I fit into this category. They may hire outside advisement, and typically do not make large or frequent transactions. The retail investment community has been growing year over year, as individuals realize the benefits of escaping some of the fee traps of the larger investment institutions and want more control of their money, though many of these larger institutions have been lowering their fees (somewhat) in direct response to lower fee competition. Retail investors will use low-fee institutional investors and their funds (e.g. exchange traded funds) to achieve their goals.

   There are many trillions of dollars tied up in institutional investing and within these various institutional products and services. If you could imagine, for a moment, the thousands of institutions, all holding various funds or products, with hundreds of stocks and bonds in various mixes within each fund, the significance of institutional investing starts to take hold. The fact that a large amount of money is tied up in products that offer long term objectives and goals, makes these products less likely to turn over in the market, and therefore, they in themselves, produce a technical resistance to stock price changes. What is a technical resistance? A technical resistance in a point of price resistance in a stock, where it tends to not go down further, due to others holding their positions and not selling.

   Some of these institutions make it hard for investors to make changes (eg sell off), and have checks and balances within their construct to “protect you from yourself”. If you are invested with any large mutual fund company like Investors Group, for example, it’s not easy or quick to transact a sale of any part of your portfolio. It’s even more likely that you don’t really look at it that much, beyond the quarterly and annual reports you get. However, if you have directly bought products like an ETF (exchange traded fund)  from Blackrock or Vanguard off the open market thorugh an online brokerage, you can buy and sell these easily and same day.

   At the end of the day, what am I trying to say? I’m saying don’t expect a total market collapse during a selloff due to large amount of stock market investment held in institutions, and the goals and objectives of institutional investment products to be held long term. Investments in institutional products tend to be more insulated from the mass market movement during selloffs. These funds are meant to be held for a long time, usually put on dividend reinvestment plans, and constantly contributed into during RRSP, TFSA, FHSA seasons. This means they are constantly growing the market cap of all their underlying investments in the stock market. This is why, in a market sell-off, there is always a point of price resistance on the common stocks held in mutual funds around the world.

   This point of price resistance is bouyed by the institutional investment strength of any one stock, and their positions and target percentages in various funds in the market. For example, if the top holding of all the global index funds in the world are Microsoft at 5-10%, it’s more likely that this stock will have a higher technical price resistance than say, a stock that holds the lowest position in a global index fund, or a stock that does not even qualify to be in an index fund. That’s why, in Canada, financials, utilities, and infrastructure remain strong sectors as they form the majority of top holdings in dividend paying and Canadian index funds. For example, you will see a few Canadian banks in the top 10 holdings of every index fund out there tracking the TSX. This is not to say these funds will always keep their positions. In fact, their position might change due to various factors. For instance, Spotify has moved up in position in various Canadian index funds, as the share price has been driven up in the last couple years. When share prices increase significanly, so does the value of the their holdings within these funds, moving them up in terms of percentage of holdings. Stocks may fall out of grace too, and move down in fund holdings, and if they don’t meet fund performance targets, can even be kicked out of the funds.

   You have to watch major index fund holdings and their top 5-10 stocks to get a clear picture of the magnitude and importance of institutional investing. This will also give you an indication of where the “professionals” are hedging their bets on the top market-movers and/or top market-producers, and perhaps (should) put your mind at ease as a retail investor if you have invested directly into any of these stocks.

   To recap, institutions and institutional investors inject a lot of cash into the market caps of the top stocks in markets across the world and are, for all intents and purposes, in it for the long haul. By doing this, they keep pricing fairly stable and predictable in the stocks they invest in. While many retail investors follow similar strategies, and will use institutions, a lot of the retail sectors tend can add more volatility to the market.

   I’ve oversimplified my point of view. There are hedge funds and cover-call funds, and experienced retail investors who play the short and cover-call strategies. There is a lot of trading on these strategies that goes on daily in the market which creates minor volatility.

   My basic point is, there are large lists of quality stocks in the hundreds of thousands of index and specialty funds that have cash locked up in long term strategies, which provides a price resistance to these underlying stocks when the market tumbles. And, there are a LOT of these funds in circulation, constantly growing, and holding significant portion (MANY TRILLIONS) of the market cap within the thousands of stocks they hold. These funds and insitutional investments play an important role in bouying the stock market against total selloffs, and keeping the value of their investments growing over the long term.

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