GLG Continental Europe fund

While macro problems remain, decisive policy action last year and a corporate sector in rude health has led many market watchers to call 2013 a good entry point for European equities.

“If three brokers have a buy recommendation on a stock and a sell comes through, we will close that position based on signs of a breaking consensus.”

Sandy Rattray

For institutional investors, the ongoing challenge is to find a portfolio with a long track record of solid performance and a repeatable process that suggests this can continue – step forward GLG Continental European.Sandy Rattray assumed control of the fund back in 2009 amid the firm’s takeover of SGAM, introducing a process based purely on broker buy recommendations.In the period since, the portfolio has produced annualised performance approaching 9% and is comfortably top quartile in a sector that houses many of the industry’s most respected stockpickers.Academic analysis Rattray joined GLG in May 2007 after 15 years at Goldman Sachs, during which time he was a co-inventor of the VIX index to measure volatility. Such an academic bent is evident on the European process, started back in 2005 as GLG looked to identify which analysts were adding value on a consistent basis. To do this, the firm built a website and asked leading research houses across Europe to feed in and manage their ideas, allowing the GLG team to measure ongoing performance. As a large long-only and long-short house, the group has significant commission to distribute and this is done in line with how many successful recommendations come from each firm.“If you talk to most fund managers, there is plenty of scepticism about analysts adding value,” says Rattray. “Many tend to dismiss analysts as useless and claim to add all the value themselves but figures show this is clearly not the case.”Going back to the mid 1990s, analyst buy recommendations have beaten the European market every year apart from 1997. Rattray says very few so-called active managers can boast this level of consistency over such a long period. As for the single underperforming year, this came at the start of the technology bubble when many analysts were still value orientated and failed to spot the growing trend quickly enough.Rather than having several individuals from Merrills all feeding in research, every firm has a single sales representative offering their best ideas, with evidence showing these add more alpha than average analyst recommendations.Taking the Merrills example again, the group has around 100 analysts with four or five ideas each and GLG’s selected broker is expected to filter these to find the best 5%.Figures show the impact of performance of this sifting process. Since 1994, analyst recommendations in Europe have added around 4% in alpha each year and Rattray says that would already get into the top quartile of fund performance over the period.“With brokers choosing the best ideas and using their discretion on timing, the alpha increases to around 6% a year,” he adds. “Again, cynics might suggest most of this is coming from small-cap ideas and special situations but most of our alpha has derived from the most-covered large caps in the benchmark. People will also claim broker ideas tend to be momentum driven but we have also found little correlation between our alpha and market direction – in any case, most managers typically outperform in rising markets.”Rattray and team run around $1.7bn across this ‘broker performance effect’ strategy, with $1bn in an exchange traded fund, some run for a sovereign wealth fund and the rest spread across various portfolios.At this stage, the UK-domiciled Continental European vehicle is the smallest at just over £50m, with the manager citing local investors’ scepticism on continental equities as a key factor.“This is also much more of an engineering approach to portfolio construction, which is more popular in Germany and Scandinavia than the UK, where many investors still like the concept of star managers,” he adds.With 30 to 40 new ideas coming in each day – as well as brokers closing and adjusting recommendations – the approach is fairly process driven to cut this down to the fund’s 200-250 holdings, initially eliminating illiquid stocks.