Mutual Funds Re-categorised... But What About Stocks?

Last week, the market regulator announced a few steps to rationalise categories for mutual fund schemes. The regulator asked mutual funds to categorise all their schemes within five baskets - Equity schemes, debt schemes, Hybrid schemes, solution oriented schemes, and other schemes.

Equity schemes are further divided in to ten sub-categories - multi cap fund, large cap fund, large and midcap fund, midcap fund, smallcap fund, dividend yield fund, value fund and contra fund, focused fund, sectoral/thematic fund, and ELSS.

Along with this the regulator has also defined companies by market capitalisation. So, the first 100 companies, in terms of full market capitalisation, are categorised as largecap. 101st to 250th company in terms of full market capitalisation are midcap. And, the remaining ones are smallcap.

According to the new rules, fund houses will be able to keep only one scheme per sub-category. Funds which have multiple schemes in the same sub-category will have to merge them. As per industry experts, this may bring the number of schemes from 2,000 down to 1,300.

The new rules will reduce the clutter for investors and provide better clarity before buying a mutual fund scheme. Now, this is a welcome step which will improve transparency.

But, there is one more place where retail investors need more clarity before buying a stock. And unfortunately, the regulator cannot help him as it's a behavioral bias, which the investor must deal with on his own.

I am talking about the myth of high-priced stocks. Retail investors normally think that high-priced stocks are expensive and low-priced stocks are cheap.

This is a myth which needs to be busted. So, I am sharing an article I wrote two years ago.

Myth of High priced stocks

Apurva Sheth

Our friends at Equitymaster have already dealt with this topic from a fundamental perspective, so I'm not going into the details, but if you haven't read their views on it, I strongly recommend that you read this article - Are 'high price' stocks 'expensive'?

Today, I want to explain how you can look at high priced stocks from a technical standpoint. Just have a look at the table I have attached below. The table consists list of stocks that were trading above Rs 3,000, as on 16th April 2015 along with its Beta and shareholding percentage (%) patterns across different groups. The group (A) includes percentage shares held by promoters and promoter group entities; group (B) includes percentage shares held by Institutions both foreign and domestic. These includes institutions like foreign institutional investors (FIIs), Mutual Funds, Insurance Companies, Pension Funds, etc.

Group (C) lists the sum of (A) & (B). Group (D) is the percentage shares held by Non-Institutions, which mostly comprises of HNI's and retail participants. Group (E) is the sum of (C) & (D), which is mostly 100%.

Company Name CMP Beta (%) Share held by Promoters (A) (%) Share held by Institutions (B) (%) Share held by Promoters & Institutions (A)+(B)=(C) (%) Share held by Non- Institutions (D) Total Shareholding (C)+(D)=(E)
3M India Ltd. 8,681 0.89 75.00 12.77 87.77 12.23 100.00
Abbott India Ltd. 3,981 0.26 74.99 8.15 83.14 16.86 100.00
Bajaj Finance Ltd. 4,585 0.71 61.61 19.38 80.99 19.01 100.00
Bayer CropScience Ltd. 4,146 0.89 68.96 19.42 88.38 11.63 100.00
Bharat Electronics Ltd. 3,299 1.19 75.02 18.82 93.84 6.16 100.00
Blue Dart Express Ltd. 6,469 0.57 75.00 13.29 88.29 11.71 100.00
Bosch Ltd. 26,240 0.73 71.18 19.79 90.97 9.03 100.00
Dr. Reddys Laboratories Ltd. * 3,680 0.42 25.49 44.19 69.68 12.91 82.59
Dynamatic Technologies Ltd. 3,478 0.95 51.13 22.25 73.38 26.63 100.00
Eicher Motors Ltd. 15,837 0.93 54.98 28.14 83.12 16.88 100.00
FAG Bearings India Ltd. 4,443 0.71 51.33 22.53 73.86 26.14 100.00
Gillette India Ltd. 4,749 0.46 75.00 8.59 83.59 16.41 100.00
Glaxosmithkline Consumer Healthcare Ltd. 6,377 0.37 72.46 12.95 85.41 14.60 100.00
Glaxosmithkline Pharmaceuticals Ltd. 3,313 0.18 75.00 11.35 86.35 13.65 100.00
Grasim Industries Ltd. * 3,730 1.15 25.51 39.76 65.27 20.26 85.53
Honeywell Automation India Ltd. 8,544 0.88 75.00 15.09 90.09 9.91 100.00
ICRA Ltd. 4,744 0.58 50.06 34.29 84.35 15.66 100.00
Kirloskar Brothers Investment Ltd. 4,088 0.41 72.24 8.43 80.67 19.33 100.00
Lakshmi Machine Works Ltd. 3,875 0.60 28.35 27.95 56.30 43.70 100.00
Maruti Suzuki India Ltd. 3,678 1.00 56.21 36.86 93.07 6.94 100.00
Monsanto India Ltd. 3,122 1.10 72.14 4.98 77.12 22.87 100.00
MRF Ltd. 41,560 1.07 27.22 18.12 45.34 54.65 100.00
Nestle India Ltd. 7,027 0.47 62.76 18.51 81.27 18.73 100.00
Oracle Financial Services Software Ltd. 3,421 0.48 74.52 14.51 89.03 10.98 100.00
Orissa Minerals Development Company Ltd. 3,146 1.29 50.01 17.80 67.81 32.19 100.00
Page Industries Ltd. 13,413 0.17 51.00 38.84 89.84 10.15 100.00
Procter & Gamble Hygiene & Health Care Ltd. 7,148 0.44 70.64 13.37 84.01 15.99 100.00
Sanofi India Ltd. 3,387 0.27 60.40 29.07 89.47 10.53 100.00
Shree Cement Ltd. 10,452 0.59 64.79 16.88 81.67 18.33 100.00
Solar Industries (India) Ltd. 3,751 0.76 72.91 18.86 91.77 8.23 100.00
Tide Water Oil Company (India) Ltd. 16,058 0.80 26.22 11.21 37.43 62.57 100.00
TTK Prestige Ltd. 3,779 0.86 70.37 20.89 91.26 8.74 100.00
United Spirits Ltd. * 3,817 0.46 58.87 28.18 87.05 12.47 99.53
Wabco India Ltd. 5,684 0.60 75.00 10.98 85.98 14.02 100.00
Average   0.68 60.33 20.18 80.52 18.53  
Source: - ACE Equity, * Remaining shares held with Custodian

Now let's look at some of the key findings from this data.

The first thing that one would notice when glancing through the charts of such high-priced stocks are they tend to be less volatile compared to the market. To check this, I have calculated the Beta of stocks returns and measured their sensitivity to market returns. It is nothing but NSE-Nifty daily returns for last one year.

A beta above one generally means the stocks is both volatile and tends to move up and down with the market. A beta below 1 indicates that the stock is less volatile than the market.

Most of the above stocks have beta lower than 1. To be precise only 6 stocks out of the above 34 have a beta of 1 or above. The average beta of these stocks is at 0.68.

Now, let's look at what the possible reason could be for these stocks having a low beta.

In the adjacent column (A), you can see the percentage shares held by promoter and promoter group entities. Most of these stocks have a very high promoter holding. 16 out of these 34 companies have a promoter holding of more than 70%. The average percentage shares held by promoters is 60.33%, which is fairly high.

The column (B) list percentage shares held by Institutions like Foreign Institutional Investors & Domestic Institutional Investors. Institutional shareholding is fairly spread out across companies. Most of them own anywhere in the range of 10% to 20% in these companies. The average percentage shares held by institutions is 20.18%.

Group (C) lists the sum total of Promoter holding (A) & Institution holding (B) in these stocks. The average shares held by both of the above groups in these companies is 80.51%. This is a significantly large number. This becomes more important because, I think , these are the groups who are in the stocks for a long term. Promoters are strategic investors and will not frequently sell their shares in the open market. The Institutions also follow a similar path and won't participate frequently in the markets. And whenever they do, the change of hands will be mostly from one institution to another. This results into a lower beta for these stocks as a majority of the shareholders are holding stock from a strategic perspective and a long term point of view. They do not sell shares when the markets are down. Thus, the 'actual' free floating shares in the market are very less.

This leaves us with only one group to deal with and that is the Non-Institutions (D), which holds about 18.53% of these companies on an average. The non-institutions mostly comprise of HNI's and retail players. In some of these stocks, even the HNI community (individuals holding above 1%) hold substantial stakes and don't frequently offer their shares.

After all of this, what is actually left is very little number of shares that the 'retail' public can deal in. This results into too much money chasing too little stock. This reminds me of the age old economic principle that I spoke to you of earlier, i.e. for a stock's price to go up its demand should be higher than its supply. Simply put, more buyers than sellers, which is the case with these high-priced scrips.

Next thing that I look for is, whether there is more enthusiasm amongst buyers to get in to the stock at this point of time. Technical Parameters like Volume, Trendline or Price Pattern Breakouts are my indicators.

When both these elements merge, it's an excellent setup for a long trade. So, instead of shying away I would be more than willing to pick such stocks and recommend them to our subscribers.

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4 Responses to "Mutual Funds Re-categorised... But What About Stocks?"
SHRIKANT
18 Oct, 2017
Dear Sir, I appreciate the data, info and the conclusion derived that only mid & small cap stocks are to be focused. Thank you very much for the efforts taken for enlightening small investors like me. Pleas keep it up. Like 
nileshnak
15 Oct, 2017
Thanks Sr good convincing ability you have.i appreciate .feeling good to read your experienced views.carry on sir Like 
OLETI
13 Oct, 2017
sir, good article,nicely explained the reasons.such a holdings re-balance is required by sebi.because all the blocked and locked either white or black. we need some changes like time framing.Like fixed deposit max.long period. once period closed,again can enter.Liquified the such stocks,its my opinion no small investor involved,it is hni..etcSEBI has to review. I LIKE THIS ARTICLE. i Want know when indian market not depend on FII'S,I feel that we huge capacity to do independt trading machinism.if any article pls send. I APPRECIATE,SOME MORE GOOD ARTICLES NEEDLike 
Dr. K. S. Ananda Kumar
12 Oct, 2017
I welcome Mr. Apurv Seth, for volunteering and informing the investors of eligible high-price stocks for investment and prosperity. Thank you very much.Like 
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