The Retail Investor Advantage: Position Agility


Investing in the stock market from a retail investor's perspective (i.e. as an individual managing their own account) carries different burdens when compared to an institutional investor. For example, it is difficult in obtaining the same level of information as institutional investors, not least because most information requires payment. In addition, it's far more difficult to access management of larger companies, with various investor relations barriers in place to handle retail investor requests. It is also more difficult in that you expect a timely return from your investment, and are not paid a salary to wait for that return. However, there is one major advantage that the retail investor has, and that is Position Agility.

What is Position Agility?

Consider a £50m company that has a mixture of retail and institutional investors:

- As a retail investor, you typically own less than just 0.05% of the total shares in issue. If you owned just 0.05%, it would be worth £25,000 and chances are that, as long as the shares are not very tightly held, the £25,000 worth of shares will be fairly easy to sell in the open market, even if it takes a few days.

- As an institutional investor, you deal with larger sums of money and might own 3% of the total shares in issue. This £50m company is relatively small so institutional activity is limited, but your stake is worth £1.5m. Realistically speaking and assuming the shares are sold on the open market, it is likely to take significantly longer to sell the same quantity of shares, and the price may fall in the process as you add selling pressure into the market. As an institutional investor, it is therefore significantly more difficult to enter and exit position in small cap companies.

This poses immediate problems for an institution and is a core reason why institutional activity in small companies (and AIM) is mostly limited to retail investors and their sentiment swings. However, what this does mean is that institutional investors in small companies tend to hold their shares for months and years as opposed to weeks and days.


What is the relevance?

In this tutorial we will look at Institutional Selling, but it is relevant (in the opposite manner) for Institutional Buying. How do we know if an institution is selling? Institutions are required to release a 'Holdings RNS' when they pass certain notifiable thresholds, which usually includes 3%, and this RNS will inform you of the direction of the move (above 3% = acquisition, below 3% = disposal). Simply by understanding this, you can start to use institutional movements as a signal for entry and exit timing. Before that, you have to evaluate three key things:

1. Is the selling into strength or into weakness?
Selling into strength suggest background buying either by other institutions or by the wider market. It is the selling into weakness, and in particular extreme weakness, that is a cause for concern. Selling shortly after a news event is also a cause for concern as is selling that continues after weakness becomes apparent

2. How is the selling taking place?
Institutions typically dispose of their holdings through a couple of routes.
  1. The first route sees them dispose of shares on the open market and the prevailing price.  Occasionally an institution will take out a hedge during this process in order to partially offset downward pressure on the share price that may take place if they are selling a large stake.
  2. The second route sees them transfer their shareholding to another institution that is interested in taking a stake in the company.
3. How liquid is the company's stock?
The more illiquid the stock, the more of a risk there is that any open market sales will depress the price. Generally speaking, this test applies to most companies trading below £200m when an institution holds at least 3%, with the liquidity risk increasing significantly for stocks below £100m. For companies below £100m, institutional movements should be monitored closely.

The signalling that is relevant to retail investors occurs when an institution is actively selling into weakness in an illiquid stock, and is doing so through the open market. Consider a scenario where a company releases bad news into the market that permanently changes the fundamentals of the company to the downside. Should an institution wish to sell, it will likely take significantly longer than a retail investor, especially given there will be little buying pressure in the market.


An Example in a Chart: NetPlay TV

Click to Enlarge
In this example, it would have been prudent to reduce or contemplate exiting a position once the trend had broken (as 20p broke down), and once it became clear that Henderson were placing significant quantities of stock in the market, despite numerous, at face-value, positive trading updates in early 2014.

A different situation may see a negative news event whereby there is a sharp drop in the share price on the day of the news release (-20% for example). On that first, it is sometimes best to exit the stock in the knowledge that, if the fundamental situation has changed drastically, institutional investors will likely continue to sell their holdings over the following weeks, thereby depressing the share price further.


Additional steps to check

- Are there significant institutional shareholders in the company? You can find this on the company's investor relations section or data websites.
- Have they been adding or decreasing their holding recently? Have they been purchasing shares recently or selling them? If they have been selling, it could be worth investigating why that might be. How much of their stake have they been disposing of?
- Does an overhang seem to be stunting upward movement? Check the bid/ask spread for signs of an overhang. Check the quotable ask price relative to the mid-price. If the ask price is closer to the mid-price, than the distance between the bid price and the mid-price, there may be an institutional overhang.
- Does the institution have a notifiable short position in the company to offset a long position whilst selling stock? This can be checked via FCA records, or via shorttracker.co.uk. If a short position is held, it suggests conviction in their decision to offload their holding.
- How large is the institutional holding? The larger the holding, the greater the importance of any selling by that institution.
- How many downward thresholds have been passed? This is a measure of how eager the institution is to dispose of their shares, and the conviction they have with the sell call.

In such a circumstance, once it becomes clear that institutional selling is taking place in the open market, it is sometimes worth exiting the stock, whilst the institution offloads their stake. If the stake is particularly large, perhaps think out reasons why they may be looking to exit. This is often sensible since you can always re-enter once the trend changes back into your favour. The position agility of retail investors holds significant power.