New ETF To Track Spin-Offs

by: Andrew Corn

You can’t out-perform without beating something; a comparison is the basic measure. In investing it is usually a benchmark. A benchmark simply defined is: a standard of excellence, achievement, etc., against which similar things must be measured or judged. The S&P 500 is not only the best known benchmark, but legend has it, that if you can consistently beat it, then you are nothing short of a genius.

Institutional investors agree with this basic premise and seek to hire active managers who have “ways” of beating the index. My firm Clear Asset Management is such a firm.

There are new innovative ways to beat the benchmark, such as designing other indexes or rules-based investing methodologies. In today’s world these are referred to as “alpha generators.” We simply call them custom indexes.

Today, Clear Indexes LLC, the research subsidiary of our asset management firm, has begun publishing the Clear Spin-Off Index on the American Stock Exchange under the symbol CLRSO. Claymore Securities Inc., of Lisle, Ill., filed with the SEC on September 29, 2006 its intention to develop an exchange-traded fund based on the Clear Spin-Off Index. The registration of this ETF is effective next Friday, 12/15/06. Sometimes a custom index has such broad reaching use that an ETF is the best way to bring it to market.

Why Spin offs? The answer of course: Out-performance.

The index is comprised of carve outs and spin-offs. The thesis is that when management of a subsidiary is free to pursue its goals unencumbered by the agenda of its parent company, it will out perform. Additionally, management compensation for the subsidiary, in the form of equity, is much more closely aligned to actual performance of that subsidiary. When receiving parent company options, obvious “dilution” occurs by the performance of other business units. We tracked and tested every spin-off and carve out public company we could find over a statistically significant time frame and measured their performance.

First we examined existing academic and sell-side research which both indicated that spin-off companies tend to out-perform the broad stock market indexes. We then researched it from scratch ourselves beginning with discovery of the overall universe, finding all the potential constituents qualitatively. We examined each name for suitability and developed specific rules for criteria. By then rigorously back testing for performance, market correlation, capacity and liquidity we were able to take what was a concept to a live, invest-able index.

Our Clear goal was to find the sweet spot, meaning when to purchase these newly independent companies and rules for ownership duration. One obstacle was determining the curve of the cycle: when the companies mature, and when spin-off status is no longer relevant and as they reach a plateau.

The best way to learn these things we believe is in the laboratory. We observed, measured and analyzed. Once the optimal settings were found we wrote rules to describe when and how firms can enter and exit the index.

We then took our universe of stocks and applied our proprietary algorithms. We again measured to ensure that alpha was added by further scrutinizing the universe.

The best proof of any investment thesis is the performance. Below are the results of our back-test.

 

Spin-off Index

S&P 500

Difference

2001

-13.37%

-11.92%

-1.46%

2002

-27.91%

-22.06%

-5.85%

2003

68.61%

28.68%

39.92%

2004

34.61%

10.88%

23.73%

2005

20.46%

4.91%

15.55%

 

 

 

 

Total

70.74%

2.77%

67.97%

Annualized

11.29%

.55%

10.75%

Click to enlarge

Effective as of its last rebalance the Clear Spin-Off Index is composed of the following (constituents and weightings effective June 16, 2006):

Company Name

Ticker

Weighting

AMERIPRISE FINANCIAL INC

AMP

5.00%

ASSURANT INC

AIZ

5.00%

CLEAR CHANNEL OUTDOOR HLDGS

CCO

5.00%

DISCOVERY HOLDING CO

DISCA

5.00%

EXPEDIA INC

EXPE

5.00%

GENWORTH FINANCIAL INC

GNW

5.00%

HOSPIRA INC

HSP

5.00%

LIBERTY GLOBAL INC

LBTYA

5.00%

MOSAIC CO

MOS

5.00%

NAVTEQ CORP

NVT

5.00%

FIDELITY NATL FINANCIAL

FNF

4.95%

MONEYGRAM INTERNATIONAL INC

MGI

3.97%

BOARDWALK PIPELINE PARTNERS

BWP

3.30%

WEBMD HEALTH CORP

WBMD

3.04%

ADESA INC

KAR

2.70%

ASSURED GUARANTY LTD

AGO

2.48%

HOUSTON EXPLORATION CO

THX

2.25%

PHH CORP

PHH

1.96%

DSW INC

DSW

1.93%

KRONOS WORLDWIDE INC

KRO

1.92%

ALON USA ENERGY INC

ALJ

1.87%

ORMAT TECHNOLOGIES INC

ORA

1.71%

ACCO BRANDS CORP

ABD

1.65%

WRIGHT EXPRESS CORP

WXS

1.51%

PIPER JAFFRAY COS INC

PJC

1.50%

JACKSON HEWITT TAX SERVICE

JTX

1.48%

TOM ONLINE INC -ADR

TOMO

1.42%

BOIS D ARC ENERGY INC

BDE

1.35%

INVERNESS MEDICAL INNOVATNS

IMA

1.32%

ATLAS AMERICA INC

ATLS

1.16%

TREEHOUSE FOODS INC

THS

1.02%

WILLIAMS PARTNERS LP

WPZ

0.95%

HOLLY ENERGY PARTNERS LP

HEP

0.93%

NEW YORK & COMPANY INC

NWY

0.81%

IDENIX PHARMACEUTICALS INC

IDIX

0.71%

NATIONAL INTERSTATE CORP

NATL

0.62%

NEENAH PAPER INC

NP

0.61%

LEVITT CORP

LEV

0.41%

AFFIRMATIVE INS HOLDINGS INC

AFFM

0.33%

WPT ENTERPRISES INC

WPTE

0.14%

Click to enlarge