Expanding to Continental Europe and Asia ex-Japan
Last September, Man Group’s GLG broadened out its highly successful broker-driven Europe Plus strategy which launched in 2011 as an ETF, to include two more strategies covering Continental Europe Plus (ex-UK) and Asia Plus (ex-Japan).
Since 2005, GLG has been capturing broker recommendations to capture alpha in the form of medium-term market anomalies and turning them into a long-only portfolio. Each broker provides what they believe to be their best fundamentally driven ideas over an investment period of 60 to 90 days; the threshold for capturing these market anomalies.
The Europe Plus strategy has now grown to approximately USD800mn and as Khalil Mohammed (pictured), portfolio manager at Man Group says: “The Continental Europe Plus and the Asia Plus ETFs have gathered assets of USD135mn and USD130mn respectively. Add in the other funds we run using the same broker driven process, such as the retail fund and managed account, and the total strategy assets are approaching USD2bn as at the end of the first quarter 2014.”
The underlying benchmark for the Asia Plus strategy – the MSCI AC Pacific ex Japan – comprises over 600 stocks whereas the Asia Plus strategy only holds between 170 to 250 names.
“When we do the portfolio construction we use robust rules to ensure that we are size neutral relative to the benchmark; that means we get the same beta as the benchmark we’re trying to beat. Furthermore, it ensures that we deliver the same variability in returns but aim to add an extra bit of alpha on top; approximately 3 to 8 per cent alpha for the Asia Plus strategy because we think the Asia markets are more inefficient,” explains Mohammed.
When Man Group acquired GLP Partners in 2010 it allowed the team to start thinking about how to expand the strategy to include other regions such as Asia where Man has a presence in Hong Kong with its AHL business.
“We have to understand the business model behind each of the brokers that come into our system. We have one employee in London responsible for all of our European brokers and one in Hong Kong responsible for all the Asia ex-Japan brokers,” says Mohammed.
The Asia Plus strategy currently captures ideas from 45 different brokers to ensure that enough recommendations for both developed and emerging Asia markets are put into the portfolio to limit tracking error. In total, 11 markets are covered, four developed and seven emerging markets including Thailand, the Philippines and Malaysia.
“Even though emerging Asia markets cover less than 10 per cent of the benchmark index that we are trying to beat they cover nearly 40 per cent of the trading costs,” says Mohammed. “It’s taken a while to launch the Asia Plus strategy because we had to collect the ideas, test our rules against those ideas and then confirm whether or not any alpha was being generated.”
When it launched last September, the Asia Plus strategy returned 1.6 per cent of alpha over the last four months of 2013 with a 4 per cent tracking error. The same is true for the Continental Europe Plus strategy, which generated 4.2 per cent of outperformance (relative to the MSCI Europe ex UK Index) in 2013 with a 2.5 per cent average tracking error.
“Certain investors are going long our strategy and short the benchmark to extract the alpha and remove the beta component completely. They like the fact that the strategy offers stable and consistent alpha,” concludes Mohammed.
Opinions expressed are those of the author and may not be shared by all personnel of Man Group plc (‘Man’). These opinions are subject to change without notice, are for information purposes only and do not constitute an offer or invitation to make an investment in any financial instrument or in any product to which any member of Man’s group of companies provides investment advisory or any other services. Any forward-looking statements speak only as of the date on which they are made and are subject to risks and uncertainties that may cause actual results to differ materially from those contained in the statements. Unless stated otherwise this information is communicated by GLG Partners LP which is authorised and regulated in the UK by the Financial Conduct Authority. CH/14/0422-P.