Sandy Rattray, the manager of Man Europe GLG Plus, has evolved an investment system that relies on a blizzard of ’buy’ recommendations from sales people – not analysts. And it works.
Goldman Sachs thinks its clients are muppets – or so says Greg Smith. And many fund managers reckon the output from the sell side of investment banks is pure muppetry – momentum driven at best, desperately conflicted at worst.
Sandy Rattray of GLG, now part of Man Group, sees it rather differently – although the fact that he worked for 14 years at Goldman Sachs, much of it running the equity derivatives research group, may help to explain why.
Rattray runs the Man Europe GLG Plus fund, although until recently it was known as the Esprit Continental Europe. It invests in European companies purely on the basis of broker recommendations by the investment banks and boutiques. That’s right, those momentum-driven and conflicted thoughts.
It appears to work. The £90m fund has consistently outperformed the FTSE Europe ex-UK index since launch, and has had a particularly strong run of late. Over the past three years it is up 67%, against a 48% gain in the index, and in the past three months is up a tad over 20%. It never quite hits the top of the tables, although over most periods it is first quartile, occasionally second, but almost never third.
Let’s be clear: although GLG is part of Man Group, this is not a hedge fund. It’s a long-only fund that listens to the “buy” recommendations of sales people. It’s difficult to imagine this works – and Rattray has heard all the criticisms time and again – but he appears to be on to something. (Collinson continues below)
Rattray says that anecdotal fund manager criticism of analysts is often coloured by recollection of a particularly strong or weak recommendation.
“Fund managers often view analysts as good sources of information about companies. In general, however, fund managers do not rate analysts as stockpickers.
“If you ask some fund managers if they get value from broker research, the response you get is ’no, no, no’, it [performance] is all down to me. So why do they talk to them and pay commission? We don’t, as a whole, pay for things that we think have no value.”
”Over time … buy ideas turned out to be remarkably consistent generators of alpha. But sell ideas didn’t add anything”
In 2005, Rattray started to add some rigour and scientific analysis to broker ideas and recommendations. He started to record every idea electronically, when the “buy” or “sell” recommendation was made, when it was taken off, and what happened to stock performance in the meantime.
“Over time, we learnt a lot of things,” he says. “Buy ideas turned out to be remarkably consistent generators of alpha. But sell ideas didn’t add anything.”
In October 2007 he started to run a portfolio made up of buy ideas, and when GLG acquired SocGen, he got hold of a Europe fund. Another of the lessons from his research is that broker “buy” recommendations work better on European stocks than American stocks.
But how do you sift the vast output of ideas and recommendations into a manageable portfolio of stocks? And if the buy signals work but the sell ones don’t, isn’t that half of the fund management equation missing?
First the Man/GLG system takes recommendations from 65 suppliers at the brokers. Rattray has found that the more reliable ideas come from sales people rather than analysts. He asks each sales person to key in ideas directly into GLG, which means that at any point he has 1,200 ideas to work on.
He strips out the tiny caps and illiquids, which brings him to about 300 ideas, and from that he selects 150 to 200 names for the portfolio.
Not all ideas are equal. Some sales people, proven over time as better at producing winning ideas, are promoted through the system and given a higher influence on the process. But timing is the essence of running the portfolio.
Rattray likes to spot an early consensus (he doesn’t call it momentum, although that’s surely what it suggests). But just as important is spotting when that consensus breaks. “When everybody is saying buy, we may start to sell.” Three influential sales people may be recommending a stock as a buy, one as a sell, but the buys may be long in the tooth and the sell new. This sort of data propels Rattray to exit a position.
Turnover in the fund is exceptionally high – around 500%. But he insists management fees are no higher than competitors’.
It’s tough on Rattray that he has developed a concept that works at a time when everyone hates the investment region he’s in – Europe. But he says the money continues to flow in.
The fund was early into financials that led the rally in Europe, but more recently he has gone underweight. Now the big focus in the fund is on insurance companies, with Zurich and Allianz both in his top 10 holdings. His big underweight is in healthcare and pharmaceuticals, although he says the way to make money in Europe is to be on the right side of the trade when either banks or capital goods are making the running. Right now he’s underweight both.
Germany and Switzerland make up nearly 40% of holdings, although Spanish stocks are a surprisingly large proportion of the fund at 13%.
Rattray’s reporting system is remarkably transparent for such a complex investment system. For example, his latest update to investors said that at the end of February, the fund held 192 positions, backed by 630 ideas from 64 “key contributors” relating to 377 stocks. He also tells you that the average duration of ideas being closed over the month was 49 days, while the average age of ideas remaining open was 55.
Looking ahead, after the pause for breath following the surprisingly strong rally, Rattray sees brokers and analysts forecasting a more settled period in Europe. Brokers, it seems, are closing out the played-out themes and entering a much higher level of fresh ideas.
Rattray got a double first in economics at Cambridge, so we can be sure he understands the robustness of this system. For the rest of us? Well, the fact this is so remarkably different from portfolio management anywhere else should at least mean it’s worth a diversification play.
Patrick Collinson is personal finance editor at the Guardian.