INSEAD: Finance professors launch fund for U.S. companies to buy back own shares

INSEAD professors Urs Peyer and Theo Vermaelen today announced the launch of the PV Buyback USA Fund, a fund that invests in U.S. companies that buy back their own shares. The fund is launched on a common platform with DIMlux S.A and Deminor Investment Management BV, the asset management arm of Deminor, a Belgian firm specialising in corporate governance and shareholder protection.

The purpose of the fund is to invest in U.S.-listed companies which are pursuing open market buyback programmes that are driven by undervaluation. The shares are then held for approximately three years. Professors Peyer and Vermaelen’s strategy is based on previous research which formed 13 portfolios of 50 buyback stocks and calculated long-term performance. In each case, the portfolios beat the market, and allowed an investor to earn risk adjusted excess returns of approximately 15 percent per year.

‘Companies buy back stock for many reasons, including EPS enhancement, capital structure, and lack of growth,’ said Theo Vermaelen, Professor of Finance and Schroders Chaired Professor of International Finance and Asset Management at INSEAD. ‘The art is to detect which buybacks are driven by undervaluation. Our index measures the likelihood that a buyback is driven by undervaluation and incorporates past price behaviour, firm size, market to book and stated motivation. It’s practical and can be immediately put into use.’

Urs Peyer, Associate Professor of Finance at INSEAD, added: ‘The fund will be especially appealing to the INSEAD community as 10 percent of the performance fee will be donated to INSEAD’s endowment. This enables INSEAD alumni to give money if the school produces research that helps them beat the market.’

Peyer and Vermaelen’s approach is not only supported by research, but also by practical experience. Professor Vermaelen applied a similar strategy with success when he was responsible for portfolio selection at the KBC buyback fund in Belgium from 1998 to 2004. Using the same methodology, Peyer and Vermaelen published two recommended lists of stocks on the INSEAD Knowledge Web site in April 2009 and April 2010. The first list earned a return of 162 percent after two years and the second a return of 36 percent after one year, widely outperforming benchmarks such as the Russell 2000 and the S&P 500.

Although the minimum investment is €125,000, arrangements are made with a financial institution to make an exception for INSEAD personnel and alumni to invest a minimum of $25,000 U.S.