Insider Shadow Fund

Objective

The fund seeks to generate superior risk adjusted returns, in relation to the broad market, by investing in fundamentally sound companies which have repurchased its own shares or where its promoters’ have acquired additional shares at market prices. Typically, such an action by a company or a controlling shareholder demonstrates their conviction that the company’s growth prospects or inherent value has not been captured in its stock price at that point. Unifi’s proposition is to gain from the eventual balancing of the value-price mismatch in the market by identifying and investing in such companies after a detailed review of their fundamentals and corporate governance standards.

Investment Approach

The basic strategy is to invest in companies where the promoter or the company has acquired additional shares

 

  •  At market prices either through creeping acquisition or buyback route 
  • That seem to be motivated either by an undervalued stock price or an impending improvement in business prospects that are still to be reflected in the market price and
  • Where complete disclosures of stock purchases have been made to stock exchanges.
  • The underlying assumption behind this 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 case of small and under-tracked companies. By limiting the investible universe to such companies, we believe that we would be able to improve the probability of achieving superior risk adjusted returns.

We find that promoters typically use one or more of the following methods to increase their stake by:

  • Preferential issue of shares and/or warrants.
  • Merger of promoter owned private/public companies.
  • Creeping acquisition in open market.
  • Voluntary open offers.
  • Subscribing to the unsubscribed public portion in rights issues.
  • Initiating the company to do a buyback either through market purchases or tender offer route.
  • While preferential issues invariably enable promoters to hike stake at a price substantially lower than the market price, mergers are also structured to get the same benefit. However, we would focus only on those companies where promoters increased stake by purchasing the shares at then-prevailing market prices or at a premium in any form, be it rights, creeping acquisition, tender offers or buybacks.

Universe

Our universe is built from the news flow of disclosures made by promoters/executives/companies under Clause 7 & 8 of SEBI (Substantial Acquisition of Shares & Takeovers) Regulations and Clause 13 of SEBI (Prohibition of Insider Trading) Regulations. We will never consider companies where such disclosures are not made, thereby clearly avoiding market rumours and speculation. Such disclosures are constantly screened and fed into our internal model based on which the universe is expanded / pruned. From the universe of such companies, we would select ideas to invest based on a bottom up approach that we have been practicing over the last six years.

 

Investment Risks

While research supports the view that insider shadowing works best in the aggregate, in few cases it could result in negative value creation. Lehman Brothers did a USD 10 Billion buyback just a few months before bankruptcy. Even in Indian context, we have had similar instances as some promoters tend to get carried away in predicting that good times will continue to persist. Few promoters also just use this medium to send a signal without any genuine interest to buy. To address such risks, we will meticulously deploy a second layer of filtering based on the merit of fundamentals and scrutiny of the promoter’s behaviour.

To quote, Warren Buffet: “Before investing in a company that is repurchasing its own shares, you should investigate the company fundamentals and its management quality. Overall, if a company purchases its own shares on a regular basis and its fundamentals appear sound, you should consider buying shares in the company”.

Portfolio Structure 

The portfolio is likely to have around 15-20 stocks in the PMS platform. The investor's assets will always remain in the investor's name with a SEBI registered custodian. While tracking and monitoring of investments will be active, there’s likely to be low turnover in the fund.

Benchmark: S&P BSE Midcap