Directors still buying their own shares

Directors continued to back their own companies by buying shares in September, taking advantage of the gloom surrounding smaller stocks and exporters throughout the summer. Tom Stevenson reports.

Directors continued to be net buyers of shares in their own companies in September, although the ratio of buyers to sellers slipped from the record levels reached earlier in the summer. The keenest buyers last month were directors of exporting companies, which stood to benefit from the decline from its peak in the value of sterling.

According to Directus, an Edinburgh-based company that tracks trading in shares by directors, exporters and small capitalisation companies were most in demand last month, following heavy underperformance by the market's minnows during the blue-chip bull run so far this year.

The ratio of buyers to sellers in September was 2.8 to 1, compared to 3.7 to 1 in August and 4 to 1 in July.

The statistics chimed with similar numbers from Merrill Lynch earlier in the year, which the broker said underpinned the level of the market. According to Merrill Lynch, the ratio of buyers to sellers rarely rises above 2.5, but when it does shares tend to outperform cash in the subsequent 12 months.

Research going back to 1986 shows that in 16 of the 17 times the ratio rose above 2.5 over the past decade shares subsequently outperformed cash by an average of 15 per cent in the following year.

Distributors and the leisure and hotels sectors, along with electronic and electrical equipment, were the strongest sectors for directors buying shares, Directus said.

Directors at engineering companies buying shares outnumbered sellers by 22 to six, though the value of the purchases, at pounds 1.3m, was less than the selling total of pounds 1.7m, the research group said.

One of the reasons directors of smaller companies have been such keen buyers of shares in their own businesses has been the marked underperformance of the small shares compared to the FTSE 100 market leaders.

The rise and rise of the market this year has been driven almost exclusively by the top flight and within that by a handful of financial, pharmaceutical and oil stocks. Stripping those out of the FTSE 100 index, the rise of around a third is actually much more pedestrian and the smaller companies have fared even less well.