"Insto's" is a misused generic term and often confused. There are three main categories of players in the sharemarket (excluding Private Equity that is by definition - generally investors in private not public companies). Insto's don't often "play games" in the market (especially at the small end) - but brokers sometimes do.
1. Brokers (Pattersons, Cannacord, Bells etc.) - these guys make money through principally fees associated with capital raisings 5%+ (as well as brokerage). They have two types of clients, retail and "insto's". Retail clients are mums and pops or high net worths (HNW's). Only Insto's and HNW's can participate in placements and that is where the cheap stock goes. Brokers who support a CR generally then support the after market (by continually buying for their clients) but RARELY take any on their own balance sheets. It is a fee driven business. Insto's rarely take stock in companies like NEN until it has some real value (i.e. not speculative value). Most early stage placements go to HNW's.
2. Fund Managers - these guys manage the "Insto's" money and generally make the big fees on success. A common number is 2/20. This means the fund manager gets 2% per annum of total funds under management, plus 20% of profits. Nice work in a good market - not so good in a crap market. It is therefore in the fund managers interest to keep the fund value (read share prices!) as high as possible. If they believe in the story - they will keep buying. If they don't - they will dump the stock.
3. Insto's - generally speaking, this is your money i.e. your super! Yep - you pay to the super fund (e.g. IOOF) who then allocate that money to fund managers (with a mandate) who then proceed to buy stocks or take placements. The reason you pay a fee for having your super managed, is that the fund managers get paid 2/20 or whatever is agreed. If you choose a capital guaranteed fund - your money only go's in AAA+ or govt. bonds. If you choose a % to go in "high growth" that fund will invest in companies like NEN (maybe). The caveat there is that many funds have a base investment limit (e.g. can only invest in ASX 100/200/300 depending on the mandate). That is why you rarely see "Insto's" in stocks like NEN until they at least have significant production or reserves. Often this is why stocks like NEN get "re-rated" if/when they finally have success. When that happens a small % of a "high growth" fund will invest some money. Of course - to these funds, $2M is just a small % (if they have hundreds of millions under management of which say 10% is allocated to high growth assets) but all you need is five of these funds and you have $10M in new capital.
How do Insto's make money? Well generally, it is your super and you see your return (or loss) each period and the sum of the parts is what money is made or lost by Insto's. Money is constantly pouring in from super contributions and is always looking for a home. Even when an insto sells - that money is generally re-invested. When the market crashes - it is usually as a result of redemptions - which in effect is the superannuation clients (i.e. us!) ringing up and saying we want to switch from "high growth" to "capital guaranteed" funds. That means, the fund manager has to sell and when panic sets in - it is a viscous circle!!
It is highly complicated and a massive industry as you can imagine - and hard to summarise or ever know what truly goes on behind the scenes. There are some great books (read "Too Big to Fail") that show just how that end of town works and for the cynical - sometimes fails spectacularly!
NEN Price at posting:
41.0¢ Sentiment: Hold Disclosure: Held
