Common corporate actions like dividend increases and share repurchases are designed to improve companies’ capital structure and increase the value of their shares. Yet, said David Ikenberry, dean of the Leeds School of Business at the University of Colorado, Boulder, it takes a while for markets to react to these steps. Why that is, he says, remains a mystery, but it’s one of those common human behavioral traits that behavioral finance experts like himself believe have existed for decades and will always be present.
For firms like Cozad Asset Management, though, the lag time that exists between the announcement of a particular corporate action hits the marketplace and when it is subsequently fully priced into the stock has proven to be the perfect platform upon which to build a successful investment strategy.
In 2007, the firm teamed up with Ikenberry and launched a portfolio based upon the latter’s research in the field of corporate transactions and decision making. The small-cap value strategy has proven a huge success and a couple of months ago, Cozad launched its first publicly traded mutual fund, the Cozad Small-Cap Value Fund (COZAX), which follows the same investing principle.
The focus on behavioral finance that is the fund’s hallmark is twofold.
On the one hand, the fund monitors the actions of corporate decision makers – CEOs and CFOs, who are generally taking decisions for the betterment of their company — and executives of undervalued stocks it believes to have good future potential and strong cash flow, said David Wetherell, lead portfolio manager for Cozad’s small-cap value strategy.
“If, after initiating a dividend or announcing a share repurchase, we notice that not only the company is buying back stock but also its executives, and the market hasn’t yet reacted, that’s where we’d come in,” Wetherell said. “When those people are moving but the market is not doing anything, that is a strong tie-in to the academic research that supports our strategy.”
The period of market inactivity that typically follows a company’s announcement is equally important.