Fund Tracking Insider Trading Beats Market

Fund returns more than benchmark by buying into cos like Smartlink when promoters hiked stake

 Afund for wealthy individuals tracking insider transactions has outperformed the market and has shown that such deals are an indicator of a potential merger & acquisition event in some companies.
Insider Shadow Fund of the Chennai-based Unifi Capital, which buys into companies where insiders have traded, has returned double that of the benchmark since it was launched in June 2010. It invested in shares of companies such as SmartLink Systems, drug maker Alembic and Triveni Engineering that either sold off, or spun off divisions.
The fund that raised . 100 crore from 120 high wealthy clients last year is up 9%, compared with a 4% gain in its benchmark, BSE Midcap Index.
Promoters of SmartLink Systems, which sold its digilink business to Schenider Electric for . 503 crore in March, raised their stake to 67.3%, from 62.3% before the deal. Unifi bought shares in the company between July and August 2010 at an average cost of . 54 a share and sold at around . 70. Alembic promoters raised their stake to 63.5%, from 60 between March 2009 and March 2010. In June 2010, it spun off its pharma business and wound up loss-making vaccine business to develop real estate. Unifi had bought shares at an average cost of . 56.
"The underlying assumption behind the strategy is that the managers and controlling shareholders have a clear advantage over other market participants and are well positioned to take sensible investment decisions, especially in the case of small and undertracked companies," said G Maran, vice-president of Unifi Capital and head of products. Companies report purchase and sale by insiders in their filing with stock exchanges. Although most of the deals need not necessarily be based on secret insider information, some investors use that as an indicator of the strength or weakness of a company. It could be straight transactions, or share buybacks and some value buying by promoters. Warren Buffett, the legendary investor at Berkshire Hathaway, follows this.
"We searched for companies that were large re-purchasers of their shares," Buffett had said. "This often was a tipoff that the company was both undervalued and run by a shareholder-oriented management."
In the March quarter, when midcap index fell the most, insider buys grew significantly. Some of the cases include Aarti Drugs, Everest Kanto, Gitanjali Gems, Cera Sanitaryware, Pennar Industries, Graphite Industries, KCP Sugar, PVR, Dhampur Sugar, GVK Power, JP Associates and Texmaco. Big ones include Asian Paints, Apollo Tyres and Chambal Fertiliser, filings show.
It is not necessary that some corporate actions follow immediately and in some cases there may never be one for a long time.
"Since such corporate actions take time to materialise, one has to maintain a medium-term perspective," said Maran. "The outperformance was nil in six months, about 5%-6% in nine months and we target to achieve an outperformance of 15% over an 18-month period."
Triveni Engineering promoters raised their stake to 68% from 60%, and then announced an equal joint venture with General Electric for its power turbines business.
The fund has ignored insider stake increases in case of companies with a free float of less than . 100 crore, or if the intention is for strategic reasons and not due to fundamentals. For example, in case of GMR Infrastructure, promoters are increasing stake to maintain their holding after it dropped due to sale of shares to institutional investors.
Fund Raised . 100 cr from 120 Clients

• Insider Shadow Fund looks to profit from companies where insiders have traded.

• It made big gains by investing in Alembic and Triveni Engineering that either sold off, or spun off divisions.

• The fund raised . 100 cr from 120 high wealthy clients last year. It is up 9%, compared with a 4% gain for its benchmark BSE Midcap Index