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Funds use 'insider' trades
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February 11, 1997: 3:25 p.m. ET
Mutual funds look at how company executives treat their own stock
From Correspondent William S. Rukuyser
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NEW YORK (CNNfn) -- Whenever corporate officers or directors buy or sell their company's stock, the trade must be reported to the Securities and Exchange Commission, where it then becomes public information.
Studies have found that these trades can sometimes foretell stock prices and now some mutual funds are trading on what is perfectly legal "inside" information.
"We use that as a clue, as a tip to undervaluation, to finding a cheap business in the stock market," said John Spears, general partner at Tweedy, Browne Co.
The tips have been paying off. Morningstar Inc. identified eight funds using the SEC information as a stock-picking tool. Six outperformed the average fund in their categories last year.
The best returns were posted by Goldman Sachs Growth & Income Fund, Tweedy Browne American Value, Composite Growth & Income and Bear Stearns Insider Select.
Among the stocks that Tweedy Browne has been buying based partly on this information are American Annuity Group, Tryland Group, Sun Healthcare and Transatlantic Holdings.
Like most of the fund managers, Spears said the pays the most attention to buying and usually ignores selling. (158K WAV) or (158K AIFF)
However, Geri Hom, senior portfolio manager for Charles Schwab Investment Management, said that she does monitor selling.
The Schwab Analytics Fund, launched last year, makes a special point to track these selloffs.
"Insiders have the best information about the company," Hom said. "I think there is information in their selling the stock."
No fund uses insider reports alone to pick stocks. They require interpretation and editing. Hundreds of transactions are reported daily but they may signal opportunities that are not otherwise obvious.
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SEC - EDGAR Database
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