Getting into fund managers’ heads

An example from BBRI

Note: we’ve talked about this topic on BBRI right issue in our previous post. But this time round, Erik Hartanto, our investment team lead, offers a different perspective. He tells the story of why BBRI’s price dropped sharply and later increased sharply just before and after BBRI’s right issue from the perspective of fund managers.

Remember 2 years ago when BBRI had a right issue that everyone in the market talked about? Let’s talk about that because I think there’s a lot you can learn studying it. There are a lot of technical details incoming but I'll do my best to simplify it as much as possible.

What happened?

The government wanted to inject stocks from Pengadaian and Permodalan Nasional Madani (PNM). Basically the government wanted to combine those with BBRI, so they issued a whole bunch of stocks through a right issue to make that happen.

To put in simply: the government wanted to give Pengadaian and PMN to BBRI in exchange for new BBRI stocks.

The way a right issue works is that all existing shareholders of BBRI were given the option to buy more stocks at a predetermined price. In the case of BBRI, the deal was: for every 4.3 BBRI stocks an investor owns, he is given a right that allows him to buy 1 new BBRI stock at Rp 3400.

This got a lot of investors talking:

• What do I do with my BBRI stocks. Should I sell it?

• Should I exercise my right?

• Is this a good time to buy BBRI?

But the one most important question that everybody is asking is: Where is BBRI stock going?

Nobody can ever be sure, of course. But looking at the data and basic supply-demand analysis can give some guidance.

Know there is only one absolute in the stock market:

When enough investors buy a stock it will go up in price, and when investors sell the price will drop.

So if you’re ever wondering whether a stock is likely to go up, you need to ask if there are enough buyers willing to pay more. Likewise if you wonder whether a stock is likely to drop, you need to ask if investors who currently own the stock are likely to sell.

In the case of BBRI, the stock dropped 17.7% the preceding 1 month before their last right issue trading date.

So who were the owners of BBRI stocks and why did they sell? Free float shareholders of BBRI are as follow:

• Local retail investors 4.88%

• Local institutions (funds) 16.02%

• Foreign investors 79.05%

Local funds are responsible for most of the volatility during right issue because (i) they tend to be much more active than foreign investors and (ii) they own much more shares than retail investors.

Some context:

Local funds cannot buy more BBRI stocks because it's against regulations. Local equity funds, for example, can only buy up to 10% of the portfolio into any one stock. And before right issue they local mutual funds own X% of BBRI in the portfolio weight. A lot of them are overweight BBRI because its one of the few Indonesian stocks that are investable given that most others are dogshit.

So let’s get into the heads of these fund managers:

They are already overweight BBRI and cannot own more because of regulations (remember the 10% limit). But now they are given the options to buy some BBRI at Rp 3400 in a few weeks and the stock is currently trading for Rp 3880. So why don’t we sell now at Rp 3880 and we can buy back what we sold at Rp 3400 during the right issue? And so they sold.

This partially explained the stock price dropping the weeks leading to the right issue.

This also explained the reason for the price going up immediately after the right issue. BBRI went up 20% in a month after the last right issue trading date. Why?? Because these local funds no longer have a reason to sell BBRI any further.

And when all the selling stops and the buying starts, you’d expect to see prices appreciate.

This is a simplified version of what happened. There are of course many other variables that matter but these are the takeaways I’d like you to have:

Understand the reason why people buy a stock: are they buying out of short term sentiment?? A strong positive catalyst?? Or maybe FOMO???

Understand why sellers sell: are there regulations that create incentives for them to sell?? Are they selling because they’re looking for exit liquidity in the market??

Knowing the players in the market and understanding the thinking behind their decision-making will massively help you in the Indonesian stock market