First live year: INK Canadian Insider Index beats S&P/TSX Composite by 7.8%

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Monday November 16th marked the first full live year of the INK Canadian Insider (CIN) Index. The period was dominated by a collapse in crude oil prices and the stunning fall from grace of Canada's drug giant Valeant Pharmaceuticals International (INK Edge outlook: rainy; VRX). In this down market environment, the INK CIN Index beat the S&P/TSX Composite Index by 7.76% on a total return basis.

The excess return during the first live 12-month period greatly exceeded the annualized excess return from the historical backtesting periods which usually ranged between 3.0% and 4.0% per year. In the 12 months ended November 16th of this year, the INK CIN Total Return Index dropped 0.72% versus the S&P/TSX Composite Total Return Index which fell 8.84%. The INK CIN Index also experienced lower volatility than the S&P/TSX Composite Index based on the annualized standard deviation of daily returns (12.6% versus 14.3%).

During the first live year, the INK CIN Index benefited from relatively low exposure to oil & gas exploration and production companies as well as no exposure to Healthcare, including Valeant.

With respect to the Energy sector, the Index had only one oil & gas producer during its first rebalance period of November 21, 2014 to May 15, 2015. Another two were added to the 50-stock Index on the May 15th rebalancing. The Index is rebalanced twice a year: constituents which fall into the INK Edge mixed outlook category or lower are removed and replaced with the highest ranking INK Edge stocks not already in the Index, subject to liquidity constraints. All stocks are reset to equal weight.

Low exposure to Energy and no holdings in major Banks helped the INK CIN Index to outperform

The Index's rules-based methodology is based on INK Research's proprietary INK Edge V.I.P. criteria which screens stocks on the basis of valuations, insider commitment and price momentum. While Valeant ranked high on price momentum on both rebalancing dates, it never ranked high enough on the other criteria to make the cut-off for inclusion in the Index. Although not having Valeant was a relative drag on performance in the early months, the Index benefited significantly this summer when the share price collapsed based on accounting and drug pricing concerns.

While having no exposure to Valeant hurt for most of the period, it paid off this summer.

The Index also held no major chartered banks during its first live year. Instead, real estate related stocks and investment company oriented firms Onex (+30.72%) and Fairfax Financial Holdings (+17.76%) helped boost Index relative performance.

Because insider signals tend to be strongest among small and mid cap stocks, the Index historically has a mid-cap bias. To be eligible for Index inclusion during a rebalancing, a stock must have a market cap of at least $250 million. There are no sector constraints.

The November 2015 rebalancing was announced last Friday and will take place Friday November 20th. The Index is quoted in real-time throughout the day on INKResearch.com and CanadianInsider.com. Index methodology, characteristics, announcements, performance, and constituents information is available at index.research.com. The Index is tracked by the Horizons Cdn Insider Index ETF (HII).

Disclosure: INK Research receives a licence fee from Horizons ETFs for providing indexing services for the Horizons Cdn Insider Index ETF. Prospective investors in any investment product which licences this Index are cautioned not to rely on any statements set forth here. Prospective investors are advised to make an investment in any such investment product only after carefully considering the risks and fees involved which are typically explained in a prospectus or similar document prepared by the issuer of the investment product. Do not assume that any such investment product will have performance results that track the Index or provide positive returns due to associated transaction costs, fees and other factors such as but not limited to market risk. 

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