Director dealings as an investment style : a portfolio time series approach

Abstract

The Insider Trading Act of 1999 and JSE regulations require transparency in director dealings and as a result create an unprecedented dissemination of investment signals to the market. This research study used director dealing information and a portfolio time series approach that included the entire population of 13,840 JSE All Share Index (ALSI) director dealings during a 130- month period between 2002 and 2013. With the assistance of a style engine and through an experimental research approach, an optimal Buy and Sell investment style was established. The equal weighted ALSI provided a comparative benchmark. Most studies on JSE director dealings, using an event study methodology, have not identified an investment style to be followed successfully during certain periods. The results have at best shown statistically significant, but economically insignificant, abnormal returns. The results of this study were visually, statistically and economically significant in comparison. It was proven that outside investors should, rationally, acquire shares when directors acquire shares but they should, counter intuitively, purchase shares when directors sell shares. The optimal director dealing investment style for creating a director dealing Buy portfolio includes applying a holding period of four months, a lookback period of three months and a minimum percentage of market capitalisation traded of 0.0013% or more. The optimal director dealing investment style for creating a director dealing Sell portfolio includes applying a holding period of three months, a lookback period of three months and a minimum percentage of market capitalisation traded between 0.005% and 0.030%. The optimal director dealings Buy and Sell portfolios achieved a CAGR (Compound Annual Growth Rate) of 29.5% and 27.8% respectively. The comparative benchmark achieved a CAGR of 19.1% over the same relevant period.