Many investors believe that tracking the flow of institutional funds into the stock market gives a potentially profitable insight into where "the smart money" invests. One challenge to tracking institutional investments is that institutions report them only quarterly, and investment information that is three months old may no longer be relevant. Another matter concerns the relationship between institutional investment and stock performance: Unless the majority of institutional investors outperform the market, tracking institutional investment may be a futile exercise.
Tracking Mutual Fund Investments
Track the quarterly inflows of mutual funds. The U.S. Securities and Exchange Commission requires mutual fund managers to disclose their portfolios quarterly. Comparison of a fund's holdings from quarter to quarter reveals which stocks have the fund management's strongest support. One approach to finding useful information about fund purchases is to go to the sites of a few top-ranked funds, where you can see their top 10 holdings and the percentages of each. You can also visit online market-tracking sites, some of which require a subscription, for information about mutual fund purchases, including the number of funds owning a particular stock in the most recent quarter. If you track these sites over successive quarters, you can see which stocks the funds are accumulating.
Track Trading Volume
Track trading volume to overcome the limitations of quarterly institutional disclosures. "Investors Business Daily" provides daily and weekly volume information for every listed stock. It often has accompanying articles that name those stocks with the greatest recent accumulation, and it has a rating system -- from A to E -- it uses with volume information. "A" means the stock is being heavily bought; "E" means it is being heavily sold. This information relates directly to institutional buying, because the institutional buyers are the ones making the largest trades. If a stock shows heavy accumulation, this almost invariably means that institutions are buying it.
Financial Television Interviews
Watch financial television news. CNBC and Bloomberg Television, for example, conduct daily interviews with well-known institutional investors, including heads of hedge funds, which have no SEC requirement to report their stock trades. Invariably, the interviewer will ask investors which stocks they recommend. Their recommendations may reflect their own institutions' recent buys, as they sometimes note.
While there is nothing wrong with paying attention to institutional buying, using it as a guide for stock purchases is problematic. A detailed 2013 London School of Economics study found that mutual fund managers who buy stocks on the basis of institutional buying by other managers have the lowest returns. This tendency, which the study called "fund-herding," reliably identifies those fund managers with the poorest demonstrable stock-picking skills. Fund managers who herded underperformed the mutual fund average by more than 2 percent, and their underperformance persisted over several years.
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