Diary Of An Investment Fund (Part One: The Market Movers)
12 January 2008It is ten past ten, and Mark, the order taker, watches the market with anxious rapture. He has a pending order to push, sell a million shares of some mining stock. As he was trained he examines the bids and offers every five seconds, and in between he watches the stock ticker, which has been sluggish all morning. He can sell anytime, but he waits patiently as he was trained. If he could find a good opening he could sell at a higher price and beat the average: two, maybe three cents better to make the client happy. He waits anxiously.
And then it happens.
The ticker fills with a shower of red as a sell order hits the market. In the millisecond it took for trader Mark to blink, the bids are taken off the screen. The ticker pauses for a half-breath, long enough for Mark to semi-realize it. And as he finally punches his own selling order in, the ticker resumes with another shower of red. Trader Mark immediately checks the done transactions for the identities of his enemies, but he already knows the truth. A foreign broker just sold. Foreign brokers are selling. Foreign brokers are taking his client’s money away.
In another half-instant Mark sees his order only partially done! Two hundred thousand shares pending. Automatic reflexes kick in and Mark quickly cancels the remaining pending and hits the market with two hundred thousand down. He has no time to blink again before another wave of selling floods the screens.
If one spends enough time trading in the Philippine Stock Market one question inevitably surfaces: what will the foreign brokers do today? As any one who has been watching the market knows, it is brokerages with large transactions that move the market at any given day.
Based on PSE statistics, in 2007, a total turnover of PHP2.6 Trillion was transacted on the stock exchange. This is more than double the Php1.1 Trillion that was transacted in 2006. Of this huge amount, foreign brokers and large local brokers accounted for 80% of the total volume. 70% of the volume was done by the top 10, which are mostly foreign brokers.
The tremendous value turnover of these brokers is due mainly to their clientele: government and private institutional funds, which are the real drivers of our stock market. Of the private institutions, many are equity funds run by professional portfolio managers funded by corporate and retail investors.
In the universe of institutional funds, equity funds actually account for a smaller share of total invested assets–as most institutional funds are bond/fixed-income funds. This is also due to the relative liquidity between the fixed-income market and stock market. However, within the smaller universe of institutional equity funds, there is still a tremendous amount of money changing hands (Php2.6 Trillion per annum isn't spare change).
The Philippine Stock Market is the playground for institutions, which can be divided into two main groups. The older group are Mutual Funds, which are run by Asset Management Companies and regulated by the Securities and Exchange Commission. Mutual Fund managers are members of the Investment Company Association of the Philippines (ICAP). Among the Mutual Funds, two kinds of funds participate in the stock market: Equity Funds which invest in stocks, and Balanced Funds which invest in both stocks and fixed-income securities.
The second and younger group of institutional funds are Trust Funds, the most recent being the Unit Investment Trust Funds (UITF) which began replacing Common Trust Funds (CTF) in 2004. These funds are run by bank trust departments and are regulated by the Bangko Sentral Ng Pilipinas (BSP). UITF managers are members of the Trust Officers' Association of the Philippines (TOAP). UITFs that play stocks also come in two categories: Equity and Balanced.
Data is harder to come by, although newer in the market, the sizes of some Trust Funds have already dwarfed Mutual Funds in recent years due to the active marketing of commercial banks pushing these products to their banking clients as an alternative to Treasury Bills and Time Deposits where low yields have become unattractive.
As evidenced by the transaction volume of the top brokerages, the amount of business institutional funds put through overwhelms any direct retail participation in the stock market (maybe by ratio of greater than 40:1) on a peso for peso basis. Against this backdrop, every time we see news of large brokers doing transactions at any given day, we might ask:
What are institutional funds doing? Why did foreign brokers buy or sell that stock at that time? How did “smart money” react to the market crisis? Are funds accumulating now or exiting the market?
I’d like to share another small project I did last year that attempts to answer these questions. Instead of the usual rehash of “What 2007 taught me about trading” this might be a better way to reflect on the recent 12 months of trading.
Next: Footprints of a Fund
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