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Directors share performances

We’ve analysed the share performance of all transactions commented on on this website.

That totals  comments on more than 100 company transactions, and over 350 transactions by individual directors, both executive and non exec, from November 2007 to February 2009.

If you had followed transactions by executive directors, where they were not accompanied by transactions by non execs, then the companies you would have bought or sold would have underperformed the market by 6%.

If you had followed transactions by non executive directors which were not accompanied by transactions by executive directors, then the shares you would have bought or sold would have outperformed the market by 9%.

These performance numbers relate to the share performance of the companies compared to the relevant index, and over the ‘holding period’, which may be from my comment to now, or earlier if I ‘closed’ the ‘view’.

The holding period amounts to very roughly 200 days, so these numbers are very significant on an annualised basis.

What about the number of directors transacting, does share performance have any correlation there?

Yes it does, a positive one. The greater the number of executive directors transacting at any time, the worse the performance. Conversely the greater the number of non execs, the better their performance.

I’ve weighted the share performance results with the number of directors transacting. The executive directors performance deteriorates by around a further 4 percentage points, and the non execs improves by a similar amount, calculated on a ‘per director’ basis.

Is this a suprise?

No, I suggested a divergence in performance of directors and non executive directors when I started this analysis 14 months ago.

Non execs have a much better understanding of the environment in which the company operates, and also of the valuation of the company shares, as they are able to ‘stand back’ and better analyse the environment.

Executive director share signals are clouded by disposals for tax, or buying shares to qualify for the incentive scheme. But they also have their noses to the grindstone, and therefore are less able to observe what is happening around them, to both their firms competitive position but also to stock market perceptions of their company’s shares.

This might also explain why so many executive directors bought into what they thought were cheap bank shares over the last 12 months. See Nils Pratleys article ‘Bankers lead way through the trap door’, which discusses this blinkered approach, and gives LTCM, Barclays and Yell as examples.

Is this a common phenomenon, or just apparent in bear markets. I don’t know. Most commentators, researchers, experts point to those with the most information, the CEOs, CFOs, making the best decisions. It may be that in recessions and bear markets, the individuals with a greater awareness are the non execs not the executive directors.

Time will tell.

If you require any further information, or would like to discuss these findings, please email me at followthedirectors@gmail.com, and I’ll get back to you.

If you manage institutional equities or hedge funds, then I am happy to provide a service analysing your equity portfolio on a regular basis.

Regards

Simon Winfield

http://followthedirectors.co.uk

followthedirectors@gmail.com

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I’ve not a lot to say about the Directors of Barclays (BARC, 335p) buying in last weeks placement at 282p, except to say that

1. I can imagine that there must have been a lot of internal pressure on the directors of Barclays to subscribe for shares in the placement, and given that pressure, an increase in their personal holdings of Barclays shares of between 15% and 23% doesn’t seem to me particularly, how shall I say this, convincing.

2. I looked back through recent directors trades, and see in particular that Bob Diamond in March 2008, having exercised and been delivered shares in various incentive and award schemes, sold 974,000 shares at prices of 454p (4/3) and 461p (12/3) to ‘satisfy withholding liabilities’ *. I find it an intriguing coincidence then that he buys [back] almost the same amount, 1,025,000 shares at 282p last week.

* ‘satisfy withholding liabilities’ = pay tax. This is normal routine behaviour when share options are exercised or released to directors.

Today FT.com reports on RBS: ‘ Sir Fred Goodwin, chief executive, said the bank had been “comparatively unaffected” by turbulence in world markets and the write-down because of credit market moves would be a net £950m in the second half. This is below the £1bn to £2bn range of expectations.’

RBS

On November 12th followthedirectors reported: ‘Strong message from RBS’. ‘Five non exec directors of Royal Bank of Scotland (RBS) last week bought shares at between 403p and 423p. They increased their shareholdings by a significant amount, by between 25 and 150%, and put in between £40k and £495k of their own money.

I went on to comment that ‘For a bank which is supposedly sitting on possible losses of several billion pounds this is certainly interesting behaviour. It also signals to me that the market has oversold RBS in anticipation of the disclosure of these losses.’

So, friends, did the market listen to the strong message that the RBS directors were sending? Mostly, yes.

The FTSE over that period is up from 6300 to 6500, a rise of 3%

Since my report on November 12th in the am, RBS are up from 402p open, or 406p where I bought them that morning, to 493p now, a rise of 21%.

And while I’m blowing my trumpet, in the same post I suggested a switch (or short position) out of Standard Chartered and HSBC into Barclays and RBS.

If you (or I for that matter) had done this, then your long positions would be up on average 19% (RBS 21%, Barc 17%) and your short positions up on average 8% (Stan 15%, HSBC 1%), a return of 11%. Go back to my post of November 12th for director dealing driven signals that prompted this suggested trade.

Five non exec directors of Royal Bank of Scotland (RBS) last week bought shares at between 403p and 423p. They increased their shareholdings by a significant amount, by between 25 and 150%, and put in between £40k and £495k of their own money.

For a bank which is supposedly sitting on possible losses of several billion pounds this is certainly interesting behaviour. It also signals to me that the market has oversold RBS in anticipation of the disclosure of these losses.

The top for RBS was signalled in March by Finance Director Whittaker, who sold almost £500k of shares in his employer at prices almost 75% higher than today.  I believe last Thursday and Fridays purchases signal a buying opportunity.

If I look at the sector overall, I find the biggest director buying in Barclays (£600k) and RBS (£2.2m) over the last 30 days. Selling has been in HSBC (Non exec Hughes Hallett almost £1m) and Standard Chartered (Chairman Davies £1.5m) both in mid October. Bothy these stocks rank amongst the best performers of the month, down only 11% and 2% over the last thirty days, while RBS and Barclays rank amongst the worst performers, bar Northern Rock, down 28% and 27% over the same period.

If I were a betting man, I’d switch out of STAN and HSBC into BARC and RBS ahead of write down disclosures below what the market now anticipates. And I’d also be looking for more news about something potentially much more serious, contagion of a US and European slowdown to Asian economies.

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