What in the world is an institutional investor?

By Ken Kurson • Bankrate.com

When you buy a stock, you’re a retail investor. When someone with a ton of money — an insurance company, investment company or pension fund — buys a stock, they’re an institutional investor. Because they trade large quantities and are presumed to be run by knowledgeable pros, institutional investors typically receive preferential treatment, and face lower fees and fewer restrictions on the kinds of investments they can buy.

Fidelity Investments, with $996 billion to spend, is the largest institutional investor in the country. And the less known institutions aren’t all that less wealthy. TIAA-CREF, for example, provides teachers with many financial services, including Retirement Plans (IRAs and Keoghs), Mutual Funds, Personal Annuities, Life Insurance and more. With $290 billion in assets under management, TIAA-CREF (which stands for Teachers Insurance and Annuity Association — College Retirement Equities Fund) represents one time when it doesn’t pay to ignore the teacher.

Moves made by the big money often affect you, the individual investor. Because these behemoths are so large, they cannot enter or exit positions gracefully. As a result, big trades by an institution can send your stock tumbling. So it pays to know what the institutions are up to.

So how do you find out what the institutional investors are doing? My favorite site for tracking the big money is Multex’s MarketGuide. Just enter a ticker and click Instit. Ownership on the left side, and you’ll be greeted with a wealth of information on the wealthy’s information.

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Example: I entered VLNC to learn more about the institutional ownership of Valence Technology Inc. (Nasdaq: VLNC ), an advanced battery company whose stock I’ve occasionally smooched. Marketguide tells me that 29.1 percent of VLNC’s shares are owned by 88 different institutions. Capital Guardian Trust, VLNC’s largest investor, holds 2,353,333 shares, and other big names such as mutual fund families Vanguard and Founders, banks like Solomon Smith Barney and pension funds like Commonwealth of Pennsylvania Public School Employee and Texas Teachers Retirement System also own shares.

You can also learn which institutions made large changes in their positions. Looking again at VLNC, one sees that Wellington Management, which had no shares, bought 867,400 as of June 30, 2000. The Teachers Retirement System of Kentucky, on the other hand, liquidated all of its 144,200 shares, on or before Sept. 30, 2000. What these charts don’t tell you is WHY these institutional investors made the buys and sells they did — only their portfolio managers know for sure.

Even without knowing why someone bought or sold, it still pays to know who holds what. Let’s say you have most of your dough invested in Fidelity stock funds. You’re considering adding an individual stock or two to your portfolio, both for the fun of educating yourself about following stocks, but also for diversity’s sake. Should you discover that Fidelity is the biggest institutional shareholder in the stock you plan to buy, you might not be getting the diversity you thought you were.

Institutional investing info can also be used to suss out stocks that might soon be in trouble. Here’s how. Mutual fund companies tend to invest in similar stocks across the whole family — Philip Morris (NYSE: MO ), for example, might show up in a dozen different Fidelity funds. That’s because the many funds often share the same research staff, and if that staff likes MO for one fund, it probably likes it for others. For this reason and others — including the fact that funds in the same family share the same marketing and back office staffs — entire fund companies often tend to rise and fall in synch. For example, the fund family PBHG had an awful year in 1998, which affected almost all its funds.

So what’s this mean to individual investors looking at institutional ownership? Well, mutual fund managers don’t control the amount of money they have to invest. If shareholders are redeeming, fund managers have to sell stock to raise that money. That can bode ill for shares of stock in which the fund company is a large institutional investor. Say you were considering buying XYZ. You look at MarketGuide and discover that Mutual Fund company ABC is XYZ’s biggest shareholder. You see that ABC hasn’t sold any recently but you’ve been hearing that the fund company is having a rough year. Once the funds start experiencing what’s known as net redemptions — value of existing mutual fund shares sold is greater than the value of new shares bought — it’s a good bet the company will start paring its largest positions. If that includes the XYZ stock you were planning to buy, you could wind up with a loser on your hands.

Other sources for info on Institutional Investors can be had by the bible of that industry, not surprisingly called Institutional Investor magazine. Every April, II runs a very influential all-star list of the best brokerage analysts in each sector.

You might also want to check the SEC filings of mutual funds, which file quarterly portfolio reports (form 13-F). And all investors, institutional or not must also must report when their stake in a company exceeds 5 percent (form 13-D).

Finally, there are several newsletters that focus on the trades of a particular institution.

KEN KURSON has written for Forbes, Worth. Esquire. The New York Times and elsewhere.

— Posted: Nov. 15, 2000