Institutional Investors VS Individual Investors
By: Prof. Dr. Budi Frensidy – Professor of FEB UI
KONTAN – (16/8/2021) In the Indonesian stock exchange, investors are grouped into several groups. The first grouping is based on the origin of the investor, either foreign and domestic investors. As of the end of July 2021, only 16,316 foreign investors registered in the Indonesian Central Securities Depository (KSEI) or around 0.63% of the total direct investors on the IDX, which were 2,589,880 parties.
The total number of investors increased by 52.8% from the number of investors at the end of last year and rose by 1,150% compared to the position at the end of 2011, which was still at 207,136 parties.
In terms of value, the total portfolio of domestic investors is also larger, at Rp 3,027 trillion, or about 60.41% of the total portfolio in the market. Compare this with the total portfolio owned by foreign investors, which amounted to Rp 1,984 trillion, or around 39.59% of the total investor portfolio.
With the power of domestic investors at this magnitude, the important role of foreign investors in moving stock prices and the JCI is no longer as dominant as it was a dozen years ago, when they controlled up to 75% of the shares registered in KSEI. The common practice at that time for domestic stock investors to reap profits was to follow foreign investors, who were known to have better financial and analytical power.
Now what many of our retail investors hear, especially young and novice investors, are influencers. The price of small bank shares with digital stamps and technology stocks also shot up like a meteor. Meanwhile, the price of blue chip stocks, including BUKU 4 banks, seems to have lost its momentum. However, I still believe that in the long term, the stock price will converge to its value.
For the second grouping, stock investors are divided into institutional investors and individual or retail investors. The number of institutional investors is only 17,352 entities, or about 0.67% of the total retail investors. However, the portfolio value of institutional investors average about Rp 239.1 billion, while retail stock investors average only Rp 334.8 million.
Total institutional investor funds were recorded at Rp 4,149.3 trillion, or about 82.8% of the total investor funds. This amount is also equivalent to 4.8 times the value of individual investors’ portfolio of Rp 861.2 trillion, or only about 17.2% of the total investor funds.
The CFA Institute divides institutional investors into five groups, namely pension funds, foundations & endowments, insurance (life and non-life), banks and investment intermediaries. Meanwhile, KSEI classified it into seven categories, namely corporations, mutual funds, securities companies, insurance, pension funds, financial institutions and foundations.
Institutional and retail investors differ not only in the value of their portfolios, but in many other ways as well. First, stock allocation for retail investors usually depends on age, ability to take risk, and willingness to take risk.
The younger the age of the investor, and the higher the ability and willingness to take risks, the larger the proportion of shares should be. Characteristics of investors with low ability to take risks are those with small assets, do not have pension funds, having many dependents, and a need for liquidity in the short term. Meanwhile, those with higher ability to take risks are those who do not have debt, still far from retirement, have few dependents, have pension funds, large income and assets, and will receive inheritance.
For the willingness to take risks, retail investors are divided into those who have a low tolerance or are conservative and those who dare to take risks, namely those who pursue growth, such as entrepreneurs. Financial planners need to pay attention to the three factors above. Even if an investor is young and capable of taking high risks, his asset allocation in stocks should not be large if his risk tolerance is low, because he will not be comfortable.
Meanwhile, for institutional investors, the percentage in shares is based on the target return and duration of their liabilities, not on the age of the institution. The larger the target yield to be obtained, with the consequence of increasing risk, the greater the allocation for shares. In the institutional group, endowments are generally the most flexible, so they have the highest target return. Meanwhile, banks are the most conservative.
Second, because they manage public funds or company funds, institutional investors are required to diversify into dozens of liquid stocks from good companies, namely those with large market capitalization and periodic rebalancing. On the other hand, retail investors with the principle that it is important to profit (YPC), are more likely to pursue stocks that are currently moving. Therefore, stock recommendations for institutional investors and for retail investors may differ.
In contrast to institutional investors, diversification and buying liquid stocks and large market caps as well as rebalancing for retail investors is an option. They sometimes actually look for small-cap stocks that are not on the investment radar of institutional investors.
When the prices of these stocks continue to rise so that they are included in the list of 10 or 20 stocks with the largest market capitalization, then institutional investors will start to enter, for fear of being abandoned by their customers if they do not collect trending stocks in the market in their portfolios.
Third, institutional investors are generally shackled by many rules that bind them, such as being prohibited from conducting transactions on derivative instruments, warrants, margin, short sales, reverse repo of speculative stocks, stocks on foreign exchanges, small cap stocks, and stocks with few daily transactions.
There are two lessons from understanding the grouping of stock investors. First, retail investors are much more flexible than institutional investors. Second, those who have more control over stock prices and the JCI on the IDX are institutional investors, with thousands of trillions of rupiah in funds.
(am)