The Spin-Off Anomaly

The straightforward strategy of buying companies that have recently been spun off from their parent has generated very good results. Here's the performance of the Bloomberg Spin-Off index (BNSPIN Index) since 2003. As you can see, it's pretty good, a 15% annualized return vs a 6% for the S&P500 over that period. Volatility was higher but not extremely so (20% vs. 15%), while the beta was pretty close to 1.0.

Is this a crazy recent phenomenon? No. In 2003 McConnell and Ovtchinikov looked at 311 spinoffs undertaken by 267 parents between January 1965 and December 2000. On average, subsidiaries outperformed their benchmark companies by over 20% over the first three years following the spinoffs, with most of the excess returns within the first 12 months of trading. They found the parent company outperformed as well, but not by a robust amount.

I don't think there's a rational explanation for this. I remember at Moody's when they just spun off from Dunn &Bradstreet, it was really liberating. For years D&B had used the considerable Moody's cashflow to fund their dumb ideas to extend D&B, which really ran the executive board while Moody's made all the money. It was a classic waste of shareholder money, and so when the spin-off finally happened in 2000, Moody's (MCO) stopped burning its cash and investors reaped the windfall (32% return, annualized, from 2000-present). It's amazing how much money is wasted via such politics, but it's a classic case of a bad incentives and difficult monitoring.

It makes one wonder about the value potential in Citi (C). If someone could force it to sell itself into pieces, I bet everyone with defensible interests would hit a home run. Letting a $120B company underperform is really painful to behold. The only people such behemoths serve now are a select bunch of executives and politicians, not shareholders, consumers, or 99.99% of Citi employees.