May 4, 2012
Written By Walter S. Frank
“Guggenheim Insider Sentiment (NFO)—This fund tracks an index designed by Sabrient Systems, the Sabrient Insider Sentiment Index. In the introduction to the details of the index, Sabrient quotes the former manager of Fidelity Magellan Fund, Peter Lynch: ‘Insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise.’ And that, in a nutshell, is the theory behind the index and the Guggenheim Insider Sentiment ETF.
“While trading on specific non-public knowledge is not allowed, people working within a firm will always have general knowledge that is not widely public, and presumably use this in deciding whether and when to make trades. So examining insider transactions can provide some indication about a company’s prospects. In seeking to create an index of 100 equally weighted stocks, Sabrient looks at insiders buying stock on the open market, rather than transactions that are part of compensation. Then they include the opinions of Wall Street analysts as a check. If both are positive, a stock is eligible for inclusion in the index.
“Four primary quantitative factors are used to select the actual index components. First is the number of insiders that have purchased company stock with cash. Next is the percent increase in holdings for the purchasers—the bigger the better! Sabrient also considers the number of positive analyst revisions in expectations, and finally, the amount by which analysts increase expectations. The index is limited to 25% turnover per quarter, and includes all market capitalizations. The resulting portfolio has 47% of its assets in small- or micro-cap stocks, 30% in mid-caps and 23% in large fare.
“The fund falls into Morningstar’s mid blend category, and compared to its peers, has heavier weightings in the consumer defensive, energy and financial services sectors, and less in industrials, health care and technology. Top holding Atlas Energy (ATLS, production, transportation and processing of oil and natural gas) has been a big winner with a gain of more than 63% through April 13 this year. The remainder of the fund’s top five holdings: Insurer American International Group, which underwent a government bailout, MIPS Technology, which develops advanced reduced instruction set computing (RISC) processors, Apple, and PHH, a specialty finance firm which focuses on fleet management, are all ahead by at least 40%. The fund has gained 10.1% for the year to date, somewhat ahead of its peer group and the S&P 500.”
Walter S. Frank, MONEYLETTER, April 20, 2012