We believe the S&P’s methodology is flawed. They increase constituent weightings as corporate insiders sell and decrease the weighting when insiders buy. For example, Amazon’s market cap is Free Float adjusted to exclude shares owned by Jeff Bezos when determining its weighting in the S&P 500. Therefore, as Jeff Bezos sells his stock or retires, the S&P increases the free float factor, leading all funds that track the S&P 500 to buy more Amazon shares. We prefer to be overweight in Amazon while Jeff Bezos is involved and buying, and reduce our exposure when he retires or sells.

By weighting stocks based on the value of inside ownership, we systematically overweight companies with high inside ownership and underweight those with low inside ownership. This simple methodology has produced a 2% per year alpha against the S&P 500 since 2005 when data became available.