Institutional investors include pension funds, mutual funds, investment banks, hedge funds and other large financial institutions.
In the world of finance, the term "institutional stock purchases" often grabs headlines. These purchases can significantly influence a company's stock price and overall market sentiment. But what happens when the numbers don't add up? Specifically, what does it mean when the institutional ownership exceeds 100%?
Sometimes financial reporting platforms, such as FactSet, will report a stockholder holding more than 100% of a company's outstanding shares. This is technically impossible, but various events can trigger this reporting anomaly.
Read on to learn about this strange occurrence.
FactSet explains securities can have a percentage of total ownership over 100% for the following reasons:
Short Interest – Both the lender and the borrower have claimed ownership of the securities on their filing. This is one of the main reasons for ownership over 100%.
When shares are short-sold, the short seller borrows the shares and sells them on the market. The person buying those shares from the short seller doesn't necessarily know they're short-sold shares; they own them just like any other shares. When it comes time to report ownership, both the original owner (from whom the shares were borrowed) and the new owner (who bought the shares on the open market) may report ownership. This can lead to a scenario where more than 100% of a company's shares appear to be owned.
Difference in 'as of' dates - Due to various reporting schedules (daily, monthly, quarterly, semi-annual or annual), there is often a window of time when holdings overlap.
Institutional investors are required to report their holdings periodically, but not instantaneously. So, there might be overlaps or discrepancies based on when the buying, selling, or reporting takes place. Different institutions might report their holdings at slightly different times, leading to mismatches.
Potential Double Counting – An institution's holdings could have been captured twice under two different names, perhaps due to a 13F name change or because the same holding has been captured from two different sources. For example, a mutual fund might hold shares of a company, and that mutual fund might be owned by another larger investment fund. If both report their holdings, you could see overlap in reported ownership.
Co-advised mutual funds – Several sub-advisors of a fund erroneously report ownership of the same shares.
Misrepresented position on filing - The reported position actually included some instrument other than the common issue.
Data Errors - There's always the possibility of data errors, misreporting, or misinterpretation when gathering and analyzing large sets of data.
While the numbers can technically exceed 100% due to these reasons, it's always a good idea to approach such statistics with caution and understand the underlying factors contributing to the overage.
Derivative Instruments - Some institutional investors use derivative instruments like swaps or other contracts to gain exposure to a stock without actually owning the shares. In some circumstances, both the underlying shares and the derivative exposures might be reported, leading to an inflated ownership percentage.
The upshot is, that outstanding share ownership exceeding 100% could be down to a delay in updating the system with publicly available data. Alternatively, it could be caused by short selling.
* For an overview of short selling, read our guide on How to Short a Stock.
When Short Selling Leads to Institutional Share Ownership Over 100%
Short selling occurs when an investor bets against a stock. The investor borrows shares from an investor in the company, immediately sells them to another investor and hopes the price falls. If it does, they repurchase the shares at the lower price, return the shares to the original investor and pocket the difference.
Shorting is a common strategy used to hedge positions and is carried out by institutional and retail investors alike. Institutional investors have considerable sway over stock prices as they buy and sell shares in huge quantities.
Assume Company A has 10 million shares outstanding, and Institution A owns all 10 million. To short Company A, Institution B borrows 2 million shares from Institution A and sells them to Institution C.
While Institution A has lent the shares out, it may still consider itself the owner of these 2 million shares. Simultaneously Institution C also finds itself the owner. Therefore, in a reporting anomaly, Company A could appear to have 12 million shares outstanding (original 10m + 2m borrowed). In this instance, the institutional ownership could be reported as 120%.
The Pros and Cons of High Institutional Ownership
High institutional ownership often signals confidence in the company's leadership and growth prospects. Institutions conduct rigorous due diligence before making significant investments, so their involvement can serve as a vote of confidence for individual investors. Moreover, institutions usually have a longer investment horizon, which can help stabilize the stock price and potentially reduce volatility.
However, high institutional ownership also comes with its own set of challenges. For instance, when a large number of shares are "held by institutions," it can sometimes limit the liquidity of the stock for individual investors. Institutions typically hold their positions for extended periods, meaning fewer shares are available for trading on the open market.
Additionally, institutional investors have a considerable influence on a company's strategic decisions due to their significant shareholdings. While this can be beneficial if the institutions are aligned with the company's long-term vision, it can also pose risks if these large shareholders push for strategies that serve their interests but may not be beneficial for smaller investors or the company in the long term.
Is Hammond Power Solutions (TSE: HPS.A) Stock About to Be Shorted?
An example of a stock appearing on FactSet with institutional ownership exceeding 100% is Hammond Power Solutions Inc. (TSE: HPS.A).
In July 2022, FactSet shows Hammond’s shares held by institutions equals 460.7% (FactSet > Snapshot > Key Statistics > Institutional). Does this mean HPS stock is at risk of being heavily shorted? Let's take a closer look.
First, check the short interest (SI). High short interest is a clue that something is up. However, the short interest in Hammond Power Solutions is practically non-existent.
Next, check the float. Under FactSet's 'Ownership Summary'> 'Company' tab, the float is 87.6%, and institutional ownership is 31.9% of the float.
Finally, check 'Ownership Activity' for a view of recent share purchases.
The only recent share purchases appear to be by company insiders:
Fredrick M Jaques, HPS board member, purchased 5k shares in Q1, 2022.
William George Hammond, HPS Chairman and CEO, bought 26k shares in Q1, 2022.
As for institutional ownership, Fidelity Management & Research Co. LLC bought:
$4k shares in February
$3k shares in March
$2k shares in April
Considering recent ownership activity, it appears Hammond Power Solutions Inc. (TSE: HPS.A) is unlikely to be at imminent risk of a major short selling campaign.
*Checking the next day (FactSet > Snapshot > Key Statistics > Institutional) shows Hammond's shares held by institutions equals 28%, so the error appears to have righted itself.
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How Institutional Ownership Can Exceed 100%
To understand why institutional ownership exceeds 100%, we must grasp what "held by institutions" signifies. Typically, institutional ownership refers to the percentage of a company's outstanding shares that large financial organizations like mutual funds, pension funds, and endowments own. These institutions often hold significant stakes in various companies, providing them with a certain level of influence and stability.
Now, let's talk numbers. A company's "outstanding shares" represent the total number of shares issued by that firm. In a straightforward scenario, the sum of all ownership percentages should not exceed 100%. However, there are instances where institutional share ownership surpasses this logical limit.
So, how can institutional share ownership be over 100%? As described above, there are multiple reasons that could be the cause including the practice of stock lending and the use of derivatives.
While it may seem counterintuitive, institutional share ownership can indeed exceed 100% due to the complexities of modern financial practices. It serves as a reminder that in the intricate world of finance, not everything is as straightforward as it appears.