Analysis exposes reality behind claims of non-correlation with major benchmarks’ performance
Last year’s boom in blank-check firms spilled over into 2021, leading listings of special-purpose acquisition companies (SPACs) to exceed traditional IPOs as of February 2021 this year, based on Dealogic and SIFMA estimates. And because they offer private companies a new way to break into the public space, some have touted SPACs as a new asset class that can offer superior returns as well as diversification benefits.
But the proof, as they say, is in the performance. And according to Derek Horstmeyer, associate professor at George Mason University School of Business, along with two alums of the school, SPAC investors should exercise caution with respect to that claim.
In a piece published by the CFA Institute, Horstmeyer and his co-authors explained how they collected data on all SPACs that have listed since November 2020 and compared their pre- and post-merger performance with the performance of four U.S. stock benchmarks – the S&P 500, the Dow Jones Industrial Average, the NASDAQ Composite, and the Russell 2000 – as well as a tech ETF, the SPDR XLK.
For SPACs that have yet to announce a qualifying transaction, they selected the CNBC SPAC 50, which tracks the 50 largest U.S.-based pre-merger blank check deals by market cap; for the post-deal phase of the SPAC, they used the CNBC post-deal SPAC 50, which consists of SPACs that have identified a target and gone public.
“Between 30 November 2020 and 1 April 2021, the SPAC 50 pre-deal underperformed the SPAC 50 post-deal 12.15% to 17.61%, or by about 5 percentage points,” the authors said, adding to the body of evidence showing that SPAC performance changes after a deal is struck.
XLK returned 10.21% over the period, while the four reference stock indices’ performance ranged from 10.50% for the NASDAQ and 23.85% for the Russell 2000.
Volatility-wise, both SPAC indices showed more volatility than the other major indices, though the SPAC 50 Pre-Deal and the Russell 2000 had comparable volatility levels (26.52% and 25.16%, respectively). The SPAC 50 Post-Deal index had much greater volatility at 44.31%; the bottom quartile of SPAC performance averaged -30%, while the top quartile average was 81%.
To settle the question of diversification, they looked at how closely the performance of the two SPAC indices were correlated with that of the stock benchmarks. They found that pre-deal SPACs’ average correlation coefficient with big stock indexes averaged 0.43, while post-deal SPACs’ coefficients shot up to 0.53, suggesting that the diversification benefits observed for pre-deal SPACs are significantly eroded following a deal.
“In the pre-deal phase, SPACs were most correlated with the NASDAQ Composite, with a correlation coefficient of 0.50,” they said. “Post-deal SPACs, on the other hand, tended to follow the Russell 2000 with a correlation coefficient of 0.66.”
In the realm of statistical analysis, they noted, those correlation coefficients are pretty large. They even dwarf the correlations between stocks and bonds over the same period, as reflected by the 0.112 correlation of the S&P 500 with the Vanguard Total Bond Index.
“The claim that SPACs constitute an uncorrelated asset class relative to public equities is very much unsubstantiated,” the researchers said. “So if the goal is portfolio diversification, SPACs don’t look like the best option.”