Horizon Kinetics’ Approach to Spin-Off Research
History of Spin-Off Research
RYAN CASEY: Spin-offs have been at the core of what we've been doing at Horizon Kinetics since the firm was founded in the mid-1990s. We did a significant white paper on spin-offs in 1996, researching the space and these types of transactions, and we also have researched all these individual transactions over the last 20 years. Spin-offs are something that we like to call a predictive attribute, meaning a characteristic of a company that we believe speaks to its propensity to outperform the market over the long term. That's in contradistinction to a descriptive attribute, meaning how big a company is based on market cap or the sector in which it operates, all of which may describe what the company is and what it does and where it's located, but don't necessarily speak to its ability to outperform the market over the long term.
Horizon Kinetics Global Spin-Off Index (GSPIN) Methodology
CASEY: We want to ensure that the companies that we're adding to the Index have a sufficient amount of independence to go out and pursue their own business strategies and right-size their expense structures and so forth. We define that as at least an 80% distribution of shares to the parent company shareholders. We want to see transactions that are pure spin-offs, entailing no price discovery element and no capital being raised for the parent company through the distribution of stock. We look for companies of $500 million market cap or more and with average daily liquidity of at least $500,000. Geographically we're looking for companies that are located either in the U.S., Western Europe, or developed Asia.
Considering International Companies
SALVATOR TIANO: On average over the past twelve years, international spin-offs in developed Europe and developed Asia have comprised approximately 30% to 40% of global spin-offs. Currently that number is lower, closer to 20%, mainly due to the elevated spin-off activity in the U.S. since late 2013 and 2014. Adding international spin-offs to a portfolio of U.S. spin-offs may provide valuable diversification. Some investors consider international diversification as the only real diversification, not just by sector or market cap, but rather by country as certain countries may experience bad economic environments, whereas others may be growing rapidly during the same time. In addition to that, the activity and the volume of spin-offs can differ from time to time and by country. Currently you may see lower spin-off activity in the international space while we see a record amount of spin-offs in the U.S. A few years from now, we may, for example, experience higher spin-off activity internationally, making up for lower spin-off activity domestically.
Index Design: Capturing the Full Spin-Off Cycle
CASEY: The holding period of our Index is five years, starting with the first quarter after a company is separated. We add them right away because we have found, based on our research, that the first year of life as an independent company has, on average, been the best year for a spun off company. We hold it for the following five years because we see a long-term fundamental improvement story that plays out over at least five years, and we also want exposures in years three, four, and five to get whatever premium may come from M&A activity.
Index Review Schedule and Weighting Scheme
CASEY: The Index is rebalanced quarterly and it's also equal weight, which is actually an important characteristic in our opinion because it gives equal weighting to smaller companies, which we believe are more likely to go through those early price inefficiencies and buying opportunities of a spin-off. Larger cap spin-offs may be more followed, more understood, less likely to be kicked out of an index, and may offer less opportunity early on to buy at a particularly attractive price. However, the smaller cap names usually go under the radar and may offer some very attractive opportunities.
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Please note that Van Eck Securities Corporation offers investment products that invest in the asset class(es) included in this video. An investment in the Market Vectors Global Spin-Off ETF may be subject to risks which include, among others, risks associated with unseasoned companies that may have limited liquidity, pricing inefficiencies, and may be more speculative in nature than established companies, all of which may adversely affect the Fund. Foreign investments, specifically those in Europe and Asia, are subject to risks, which include changes in economic and political conditions, foreign currency fluctuations, changes in foreign regulations, and changes in currency exchange rates which may negatively impact the Fund’s return. Small- and medium-capitalization companies may be subject to elevated risks. The Fund’s assets may be concentrated in a particular sector and may be subject to more risk than investments in a diverse group of sectors.
Diversification neither assures profit nor protects against loss.
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