Harvesting medium-term alpha

Interview with Khalil Mohammed – The Man GLG Europe Plus strategy has proven to be successful with investors. As at end-March, the total assets in the strategy are USD1.44billion.

The strategy was developed in 2005 when GLG’s co-founder Pierre Lagrange devised the idea to monitor broker recommendations. As Khalil Mohammed, a member of the MSS portfolio management and research team explains: “The aim was to determine who in our view were the best brokers and therefore the ones we should pay attention to and ultimately reward.

“We use approximately 65 of what we believe to be the best European brokers for the strategy construction, which is benchmarked relative to the MSCI Europe index. One third are global brokers whilst two thirds are sector specialists.”

The strategy’s central premise is that, on average, the best buy recommendations may be capable of providing medium-term alpha. “After 60 days, the buy recommendation strategy has generated, on average, 175 basis points of excess returns compared to the broad European market [MSCI Europe Index],” confirms Mohammed.

“These anomalies are, however, transient. After 60 days the level of outperformance plateaus so the trick is to get in early and capture the alpha. We believe such anomalies exist because market participants i.e. institutional pension funds, tend to take weeks (even months) to react to these new buy recommendations.

“Trading costs are very important to the strategy. When we trade, our participation rate in the market is low – typically around 5 per cent. For an ETF, liquidity is one of the cornerstones and, as such, we monitor this carefully,” confirms Mohammed, adding that the strategy’s performance objectives are to generate “2 to 5 per cent alpha with a similar tracking error”.

And it seems to be working. Back in October 2007 a sovereign wealth fund allocated USD500million to the strategy and since that time until end-March 2013, it has generated alpha of 3.5 per cent annualised. The Man GLG Europe Plus Source ETF, which is based on this strategy, too is delivering compelling performance. “In 2012 we generated 534 basis points of outperformance with a tracking error of 3.3 per cent. At the beginning of that year, our contributing brokers were overweight banks and this helped deliver the bulk of the first quarter alpha. Macro news is currently dominating the European markets and there seems to be less conviction amongst the brokers who are currently underweight banks and defensive stocks like healthcare and overweight media. This has resulted in a reduction in the tracking error but we believe this will change as we get more conviction coming back into the market and more alpha generation opportunities,” comments Mohammed.

Out of a universe of 1,000 stock recommendations, the system applies a series of filters including sector, country and liquidity filters to ultimately construct a portfolio of between 200 and 250 stocks. Beta relative to the MSCI Europe Index is 1, so the strategy’s aim is to generate index “plus returns” says Mohammed.

“The Lipper rankings compare the strategy to all other European long-only managers net of fees. Since inception of the strategy [Jan 2008] to date, it is almost in the top decile. The average long-only fund has returned -11 per cent, whereas the strategy would have returned +7 per cent. S&P have also given the strategy a Gold rating on the back of two years’ performance.

“We are fully satisfied with how the strategy is performing. Broker-based alpha is there to be captured and we aim to outperform the broader market over the long term.”

Communicated by GLG Partners LP, One Curzon Street, London W1J 5HB, which is authorised and regulated in the UK by the Financial Conduct Authority. GLG Partners LP is the entity responsible for determining the composition of the index which is tracked by the Man GLG Europe Plus strategy.

Past performance is no indication for the future.The returns over the last 1 and 3 years (ending March 2013) are 14.9% and 30.6% respectively after fees.

This material is for informational purposes only and does not constitute any investment advice or research of any kind. No representation is made that the Investment Manager’s or the Fund’s investment process, investment strategies, goals or risk management techniques will or are likely to be achieved or successful.

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