FIIs DO invest in midcap stocks

I have come believe that FIIs love liquidity. They love liquid stocks and it is the large cap names that provide it. I always took it on face value and never checked it up with data. There is one question that always lingered. Since FIIs are know to be aggressive, how can they not generate alpha through midcap investments. Infact some of the broking businesses are run on this business model. I dug up some data and found that FIIs do invest and they do invest big time.

Point 1: FIIs invested Rs 156k crores in midcap stocks (both BSE & CNX Midcap stocks totaling to 264 stocks) as of Sep 2007 during the bull market. At the same time, they were invested Rs 513k crores in large cap stocks (Nifty 50 stocks). This means about 23% of the total is invested in midcap stocks. The story is no different as of Dec 2008. FIIs are invested Rs 66k crores in midcap stocks while they are invested Rs 265k crores in large cap stocks which means they are invested 20% in midcap stocks.

Point 2: I have looked at the holding of FIIs in the overall midcap landscape. As of Sep’07, the midcap stocks has a market cap of Rs 989k crores out of which the FIIs owned 16%. Guess how much did they own of the large cap stocks. It is 17.3%. In Dec’08, they own 13% of midcap stocks while they own 14.4% of large cap stocks.

Point 3: Have they concentrated their investments in individual stocks? The answer is negative. 80% of their midcap exposure is in 42% of midcap stocks as of Dec’08 compared to that of 34% in Sep’07. Is it very different when compared to the large cap stocks? The answer is ‘No’ again. 80% of large cap exposure is present in about 36% of the Nifty stocks.

Point 4: Who are these FIIs who hold midcap stocks? These are pretty well known names. HSBC Global appears in a number of them. The hold 8% of Ibull Real Estate, 7% of IVRCL Infra, 5% of Max India and 2.3% of Sesa Goa. Fid Funds Mauritius holds 9% of Financial Technologies. Merrill Lynch Espana holds 3% in Amtek Auto, Quantum M holds about 2% each of GVK Power, Ibulls Financials & Ibulls Real Estate and the list goes on.

The message is it is unsafe to assume that the midcap rally happens because of domestic players. FIIs do participate in it and in a big way. The issue is that the differenciation of domestic and foriegn participation in mid caps is hard to figure out and can be done only after companies publish their holdings data every quarter.

There are some who dicount this as a political money or black money coming into the individual stocks. I take the point. However, the magnitude and the expanse of investments is huge to discount genuine FII investment in midcap stocks through this theory.