Local institutional investors also to blame

The protracted fall of the Athens Stock Exchange has been attributed to a number of factors, such as poor corporate earnings, insufficient liquidity and the unfavorable economic and financial landscape abroad. There are many people however who think local institutional investors’ low management skills should also bear part of the blame for the Athens bourse’s miserable performance over the last couple of years. Are they right? Although it is wrong to assign all institutional money managers the same degree of responsibility for the market’s woes, there is probably some grain of truth in this assertion. Undoubtedly, all, including the government, of the Athens bourse and capital market authorities, corporations, retail and institutional investors, bankers and journalists bear responsibility for over-extending the Athens bourse’s current downtrend as well as its earlier powerful rally. However, it is institutional investors who are supposed to dominate the market on a daily basis since they manage the largest pool of domestic money available for equity investments. Therefore, it is reasonable to say that, to a large extent, the behavior of the bourse reflects their own moves and preferences. Of course, the definition of institutional investor should not be confounded with open-end funds, that is mutual funds, or closed-end funds, meaning investment trust companies, but should include insurance companies and pension funds. Mutual funds and investment trust companies may be known to the general public because it is easier to track their performance but are by no means the only institutional investment vehicles. Although there are no recent figures available, it is believed that assets under the management of state-run pension funds far surpass the assets of mutual funds and investment companies. However, rules and procedures relating to pension funds’ equity investments are so rigid and time consuming that they weaken their ability to play an active role in the market. The latest data on domestic equity funds and listed investment companies confirm that the vast majority continues to underperform the benchmark index for the second year in a row. Domestic equity funds saw their assets shrink by 23.95 percent and their units drop by 4.53 percent in September, although domestic balanced funds, which have a mixed portfolio of stocks and bonds, saw their assets rise by 3.17 percent on the back of a 6.07-percent rise in their units. The general share index of the Athens Stock Exchange fell by 19.41 percent in September. In addition to this, brokers who do business with local institutional investors confess in private that many institutional investors often act in a way which is suitable more to speculators than investors. Even some fund managers privately question the quality of local institutional money management, saying it lags behind the international standards found in more developed markets. They also agree with brokers and others that some of their colleagues have engaged in stock transactions that do not seem to serve the interests of their shareholders. Of course, there are other fund managers who say that the quality of institutional money management has improved a great deal in the last five years and claim that retail investors, journalists and others have found in institutional investors the perfect scapegoats for the stock market’s protracted decline. Although it is difficult to argue with those who say that institutional investors are not the main culprits of the Athens Stock Exchange’s poor performance, it is easy to say they bear part of the responsibility. Even today, a mere look at the composition of many institutional portfolios can be enlightening. They still hold many shares in listed companies which do not belong to the main benchmark indexes their performance is measured against. Moreover, these are non-liquid stocks, meaning the fund would suffer considerable losses if it attempted to get rid of them. Another argument which has been advanced to back up the thesis of poor portfolio management skills is the fact that very few fund managers have taken advantage of portfolio hedging through derivatives to limit their losses. Even the majority of those funds that finally did so were latecomers, depriving their shareholders of any benefits. Of course, the index futures, and especially options traded on the Athens derivatives exchange, are not very liquid. Nevertheless, they could have hedged part of a stock portfolio or change its beta – a measure of the portfolio’s sensitivity to general market moves – making it more defensive at a time of increased uncertainty. It is certainly not right to make institutional investors as a group the scapegoats of the Athens bourse’s woes. It is however quite clear that many have acted in irresponsible ways at certain points in time, hurting the general stock market and their shareholders. To this extent, it is imperative that all legal entities in the institutional investor community review their fund managers’ record by applying stricter performance and selection criteria and by putting in place rigorous training programs. This should help raise the quality of portfolio management, without disrupting operations, and produce real market leaders.