Wed, 24/11/2004 - 06:05
State Street Global Advisors (SSgA) has launched a new strategy aiming to offer investors more efficient exposure to the large-cap Australian equities market.
Targeted at institutional investors, the SSgA Australian Alpha Plus Strategy invests in ASX 100 stocks and aims to fill the risk/return gap between traditional long-only strategies and more recently developed long-short funds.
The Alpha Plus Strategy uses the same quantitative investment process as SSgA's successful long-only and long-short Australian equities strategies, but introduces the ability to take up to 30 per cent net short positions on stocks the manager believes will underperform.
Lochiel Crafter, chief investment officer of State Street Global Advisors, Australia, said this ability to "back winners and losers to the same extent" gives the manager a far greater opportunity set to add value for investors.'
He said: We've seen a big shift towards clients wanting greater returns, which has led to the loosening of risk constraints and the introduction of shorting - but still to quite a limited extent in terms of moving beyond benchmark weights."
"The Alpha Plus Strategy represents a major step beyond traditional investment approaches as it allows us to take advantage of the full spectrum of information in the market - to buy stocks we forecast to rise in value as well as short stocks we forecast to lose value. By maximizing this information power, the strategy can take more risk in a more efficient way."
The Alpha Plus Strategy aims to outperform the S&P/ASX 100 Accumulation Index by four to six per cent over rolling three to five-year periods while maintaining a target active risk of four per cent per annum.
Crafter said a key benefit of the strategy is SSgA's established quantitative approach, which is well suited to the notion of picking 'winners' as well as 'losers'.
"Our nine years of consistent above benchmark returns for our long-only equities strategy proves our process is good at picking winners, but our stock ranking research shows we are actually even better at picking losers," he said.
As part of its quantitative process, SSgA actively ranks every stock on a daily basis, looking at its current relative value and future earnings potential. Through this disciplined, risk-controlled environment, SSgA is able to clearly identify stocks likely to outperform, as well as those likely to under perform.
A second major benefit of the new strategy is its particular suitability to the Australian equities market, which is dominated by a few large stocks. For example, BHP makes up around eight per cent of the ASX 100 Index, but below the ten top stocks, no stock makes up more than two per cent of the index and only 28 stocks have a weighting of more than one per cent.
This means traditional long-only managers have a reasonably limited opportunity set to add substantial value through underweight stock positions, especially as many managers place a maximum limit on active positions (eg three per cent) relative to the index. Adding the ability to short undesirable stocks expands this opportunity set, increasing a manager's potential to take advantage of negative insights by 270 per cent (using a three per cent maximum underweight limit).
"Through Alpha Plus we can now use all of our negative information and are not restricted by the small size of securities in the benchmark. Without the ability to short stocks, the maximum active position we could take on a 50 basis point stock is to not own it, i.e. -50 basis points. This improves the information ratio because we can better align our active weights with our ranking process, eliminating the structural inefficiencies that bind the majority of traditional Australian equities strategies," added Crafter.
Due to its focus on more liquid Top 100 stocks, Alpha Plus also gets around typical size limitations for long-short strategies. Alpha Plus will be capped at USD 1 billion, compared to SSgA's Australian Long-Short Equities Strategy, which closed after quickly attracting USD 300 million.
The new strategy adds to SSgA's range of Australian equities strategies, which span the risk/return spectrum. In increasing risk/return order, these include a Passive strategy, Enhanced Yield, Long-Only Active Equities, the new Australian Alpha Plus and the Australian Long-Short Equities Strategy. Over the past 16 months funds managed by SSgA's active Australian equities team, managed by Don Hamson, have doubled from USD 1 billion to USD 2 billion.
According to InvestorInfo's Quarterly MarketWrap for June 2004, SSgA is Australia's fourth largest investment manager with USD 43 billion in Australian-sourced assets under management.
Background Note: State Street Global Advisors, the investment management group of State Street Corporation (NYSE:STT), delivers investment strategies and integrated solutions to clients worldwide across every asset class, investment approach and style. With USD 1.2 trillion in investment programs and portfolios, State Street Global Advisors has investment centres in Boston, Hong Kong, London, Montreal, Munich, Paris, Singapore, Sydney, Tokyo, and Zurich and offices in 28 cities worldwide. For more information, visit State Street Global Advisors at www.ssga.com.
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