Institutional investors support US large cap stocks

We have written about short sellers’ reaction to the slump in equities prices in the US and have highlighted how this trend has not been witnessed in Europe, as the value on stock on loan remains close to annual lows. Today we focus on holdings of institutional investors in US equities and show that this group has remained committed to US large Cap stocks with their aggregate holdings having already surpassed the pre-August stock meltdown levels. We’ll drill down to show that stocks in the Technology sector have seen the greatest number of stocks where ownership has reached a new annual high since the beginning of August, and at the other end of the scale, Media and Retails stocks have seen the greatest annual decline.

Stocks held in the lending programs of institutional investors account for just under 24% of the S&P 500. The chart below shows that while this oscillated wildly after the S&P 500 Index collapsed at the end of July, this group of investors has steadily been buying into US large cap stocks at a faster rate than the Index has recovered. What is interesting is the sustained sell off in July, just prior to the plunge in global stock prices.

The movements in aggregate lendable inventory are a reliable proxy for holdings of institutional investors, although it is worth highlighting that the scope for movement is constrained because many of these funds are tied to holding an index, in recognition of their investment strategy – be it index tracker funds or Index related ETF managers. Further, long only funds will all be measured against a benchmark that limits how far they can deviate from holding US large caps.

Institutional buy-in

Technology stocks dominate the list (see below) of institutional investors’ favorites - accounting for four out of the top ten S&P 500 stocks ranked by the greatest percentage of total shares held in lending programs. These funds who lend own an impressive 47% of the total shares of Teradyne Inc. (TER) and 45% of Novellus Systems (NVLS). The Consumer facing sector is the next most popular amongst this type of investor and it is interesting to note that Gamestop appears at number three on the list, with institutional investors owning 44% of the total shares. This stock also happens to be the most shorted in the Index – and clearly splits long and short investor sentiment.

S&P 500 – Ranked by Lendable as % of Total Shares

We have used our Toolkit to screen the S&P 500 Index to identify which sector has seen the greatest number of stocks reaching a fresh annual high in the percentage of total shares owned by institutional investors (having applied a minimum threshold of 15% ownership). Once again it is a sub-group of the Technology sector which dominates, with 11 out of 33 Software & Services stocks having seen fresh highs in institutional ownership since the beginning of August. Names of interest include Salesforce.com, Intuit Inc., Electronic Arts and Teradata Inc., which have all seen institutional ownership pass above 30% of total shares.

Institutional investors shy away from Media and Retail stocks

Having applied our same screen (again capped at a minimum institutional ownership of 15% of total shares) to identify where these investors have reduced their holdings since the beginning of August, two sectors stand out: Media and Retail.

44% of Media stocks (or seven out of the 16 stocks in the S&P 500) have seen institutional ownership fall to an annual low since the beginning of August. However, ownership in all the names listed below, with the exception of Walt Disney Co., is in line or above the average for the wider Index, implying that long only funds who lend have trimmed holdings in these names yet remain overweight when compared to the Index. It is also interesting to note that News Corp’s (A) shares rank amongst this group seeing institutional ownership at annual lows, as the fall-out from the hacking scandal at News International rumbles on.

In the retail sector, nine out the 30 stocks in the S&P 500 Index have seen institutional ownership fall to annual lows. Of the names listed below, this group of investors are underweight the Index average in Home Depot Inc., The Gap Inc., Nordstrom Inc. and Family Dollar.