A View From INSEAD

Maximise Your Returns With Share Buyback Investment Strategies

Theo Vermaelen

Theo Vermaelen
Programme Director of the Advanced International Corporate Finance programme

March 2014

The PV Buyback USA Fund, set up by Professors Theo Vermaelen and Urs Peyer, was recently shortlisted for The Emerging Event Driven Fund of 2013 Award. Here, Professor Vermaelen talks about share buyback as an investment strategy and how he teaches it on his Advanced International Corporate Finance programme.

Your PV Buyback USA fund was recently shortlisted for the Emerging Event Driven Fund of 2013 Award at The Investors Choice Hedge Fund Awards 2014. Can you explain a little about the fund and its driving strategy? 

It invests in stocks that have announced buyback programmes that we believe are driven by undervaluation.

How do you translate theory into practice when working with your fund?

Finance theory says that markets are largely efficient, except for the fact that insiders have more information than the market. As a buyback is an indirect way of insider buying (as long as the insiders have some shares in the company) and we are really trying to find those companies where the buybacks are driven by inside information.

Can you explain a little about the share buyback principle?

A buyback can be driven by many reasons (capital structure management, EPS manipulation etc…). So the art is to find companies that buy back stock because they are cheap. We have developed a screening mechanism that has very good predictive capacity.

Why is share buyback an interesting investment strategy?

Because it is based on common sense, not some complicated mathematical model. Indeed, sometimes insiders have better information than the market and they take advantage of this buy buying back stock cheap. The reason why it works is that you are going against analysts (whose negative opinions are responsible for the undervaluation) or momentum traders (traders that short after a stock has gone down). You also have to be an investor with a long investment horizon, longer than most people.  We were nominated for the best 2013 event fund award because we earned 47% in 2013. The strategy has systematically beaten the market during the last 20 years.

What are the main things to consider when adopting a share buyback investment strategy?

We look at four variables: market to book ratios, firm size, stock return during the six months before the buyback and the stated motivation for the buyback in the press release. We also appreciate direct insider buying.

To what extent is share buyback taught on Advanced International Corporate Finance?

We cover both the corporate finance aspects as well as the trading strategy.

What do participants on the programme learn about buyback strategy?

They will understand both the corporate logic as the investor logic behind buybacks.

What are the main conclusions you want participants to come away with?

That a buyback is not simply a capital structure or payout decision, but also an investment decision: sometimes it is better to invest in your own company than in a project.

To learn more about share buyback strategies and how they can be of benefit to you, enrol on the Advanced International Corporate Finance programme, directed by Professor Vermaelen.

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