Not only is a rise in foreign institutional investor (FII) holding synonymous with high

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stock returns, the FII-favoured stocks also act as wealth protectors when the market heads southward.

An analysis of BSE 500 companies shows that the top 20 stocks that saw the highest rise in FII holdings in percentage terms in the December 2009 quarter (over the September 2009 quarter) have seen a smaller decline in prices than the 20 stocks that saw the sharpest drop in FII holdings in the same period.

Simply put, in the year-to-date period in 2010, the FII favourites have lost an average 3.5 per cent while the ones hated (decreased exposure) by FIIs lost 8 per cent, Capitaline data shows. The BSE 500 index has fallen around 5.7 per cent in 2010 so far. Stocks such as Cranes Software, Amtek Auto, 3i Infotech, Tata Tea, Indiabulls Securities, Punj Lloyd, Bartronics India, Sujana Towers, Bombay Rayon, Educomp, Sintex Industries, M&M Financial and GE Shipping saw FII holdings rise by 3-11 percentage points in the October-December 2009 quarter over the July-September quarter.

This represents the sharpest hike in FII stakes and this portfolio of 20 stocks has fallen by an average 3.23 per cent. Just eight of the 20 stocks fell more than the BSE 500 index, data shows.

“In the past few months, the market has lacked a definite direction. Sometimes, FII holding is interpreted as a positive signal. So the out-performance of the FII-favoured counters can be viewed from this angle. Stocks that see reduced FII exposure may temporarily suffer from lack of trust,” said Jagannadham Thunu-guntla, equity head with New Delhi-based merchant bank SMC Capitals.

Similarly, stocks that saw FII holding fall the sharpest during the October-December quarter have delivered poor or negative returns in 2010 so far.

So a portfolio of the stocks hated most by FIIs — United Spirits, Allied Digital, Unity Infra, KSK Energy, Hindalco, Moser Baer, Bajaj Hindusthan, Yes Bank, Sunteck Realty, NIIT, Edelweiss Capital and Anant Raj — has fallen by 8.14 per cent in 2010 so far. As many as 12 out the 20 stocks have fallen more than the BSE-500 index in 2010 so far, data shows.

“A sharp drip in FII exposure is not interpreted positively. This may have led to sharper declines. FIIs moved towards mid-caps in the October-December 2009 quarter, which may have seen investors cornering this counters,” said a Mumbai-based institutional dealer of a domestic brokerage, who counts FIIs as clients.