Institutional Investors: Get Smart About the “Smart Money”

There are people who play sports in their spare time. And then there are professional athletes who’ve trained for years, get paid for their athletic talent and are often in the spotlight.

Think of institutional investors as the pro athletes of the investing game.

The group — which is sometimes referred to as Wall Street’s “smart money” — includes pension funds, mutual funds, hedge funds, banks, insurance companies, endowment funds and other types of big investors.

These professionals pool together capital and invest on behalf of others. In contrast, individual investors are generally non-professionals who buy or sell securities for themselves, often in far smaller amounts.

Over the years, the influence of institutional investors over public companies has grown dramatically, with the number of U.S. corporate shares managed by institutional investors ballooning to 67 percent in 2010 from a mere 5 percent in 1945, according to a study conducted by professors at the Wharton School of the University of Pennsylvania.

Institutions are estimated to account for as much as 70 percent of stock trading volume. All told, institutional investors controlled $25.3 trillion, or 17.4 percent of all U.S. financial assets as of the end of 2009, according to a report by the Conference Board.

Because of their dominance, institutional buying or selling can lead to big price moves in individual stocks and in the market overall.

The rise of institutional investors has been fueled in recent decades by the growing number of Americans who have invested in professionally-managed, pooled investment products, such as mutual funds.

But just as every pro athlete doesn’t become a stand out star, not every institutional investor can outperform the market. So blindly following the “smart money” can leave some investors smarting.

Here are some frequently asked questions about institutional investors:

Why are they called the “smart money”?

Institutions are often spending big sums. With deep resources at their disposal, they generally engage in sophisticated research and analysis of companies and markets.

“Institutions have resources that most mom and pops don’t have,” said Michael Jung, assistant professor of accounting at NYU Stern School of Business.

In fact, the CEOs and other top managers of public companies spend a lot of time meeting with big investors. Large, publicly-traded U.S. companies held an average of 124 one-on-one meetings with investors in 2014, according to a survey by market information company Ipreo.

But just because they have more resources doesn’t mean they will always make the right call. Even the most sophisticated financial modeling can sometime miss negative trends and can’t account for the emergence of a disruptive technology or advance.

Where can I learn about the institutional holdings in a stock?

Lists of a company’s largest shareholders can be found by researching companies on such financial websites such as Google Finance,, and others.

Another way to learn about institutional holders is to look at Securities and Exchange Commission filings. Institutions that manage over $100 million worth of securities are required to file form 13-F within 45 days of the end of each quarter, which gives a snapshot of the firm’s holdings as of a specific date. This can help individual investors track institutional holdings over time, though given the lag, what you see in the filings may no longer be true by the time you are looking at them.

In addition, institutions that acquire more than 5 percent of a voting class of a company’s stock are required to file a Schedule 13D with the SEC within 10 days of breaching that threshold. If there is any material change in ownership, a prompt amendment is required.

If the acquirer is a passive investor with no intention of changing or influencing the control of the company, the institution can instead file the shorter Schedule 13G, which can be filed as soon as 10 days after passing the 5 percent threshold, or as late as 45 days of the end of the calendar year in which that threshold was crossed, depending on the type of investor.

Individual investors can go the SEC’s website to see the names of institutional investors in a particular company, the scope of their investment and their recent purchases and sales.

Is it better to invest in companies with a high concentration of institutional ownership, or is it better to look for companies that have yet to be discovered by the “smart money”?

There are opposing views on this.

Some consider institutional ownership an important standard, among others, in choosing stocks.

Some investors look for stocks with some minimum level of institutional investors, where others aim to “get in on the ground floor,” and to find stocks with limited institutional investment to avoid the impact of a herd mentality.

In the end, investors should research all aspects of a company before investing, not just the level of interest in the stock shown by institutional investors. Both following the smart money and deliberately avoiding it can lead investors to make decisions that may not be appropriate for them.

What are some of the risks of investing in companies with a high concentration of institutional owners?

If a company has a lot of large investors, that institutional ownership could weigh heavily in shareholder voting, including proxy votes on the makeup of the Board of Directors and corporate action. Alternatively, if one institution starts selling large blocks of a stock that could prompt others to follow suit and could result in significant volatility, particularly if the institution selling is one that leads others to follow suit.

The bottom line: Institutional investors are sophisticated investment professionals and learning about their ownership could be a valuable step in researching a company. But institutional ownership — or a lack thereof — is no guarantee that a stock will perform well.