Khalil Mohammed, portfolio manager at AHL/MSS

Asian analysts twice as effective as European and US counterparts, says Man GLG

Wed, 09/10/2013 - 16:28

Asia Pacific market analysts are more effective at providing accurate price forecasts than their US and European counterparts.

 
In a paper entitled “Where are the World’s Best Analysts?”, Man GLG, the world’s second largest hedge fund, found that Asia ex-Japan analysts were able to generate excess returns (short-term alpha) of 4.06 per cent over a 90-day period, while Japan analysts were able to generate 2.37 per cent. In comparison, UK analysts generated 1.49 per cent and US analysts 1.71 per cent.
 
The results were based on IBES data provided by Thomson Reuters spanning the period 2005 to 2012. What is interesting is that the performance of Asia ex-Japan analysts has improved in recent times. When the overall data was split into two periods either side of the financial crash, 2005 to 2008 and 2009 to 2012, excess returns were found to increase from 2.5 per cent to 4.3 per cent.
 
GLG has been using a systematic process to capture the best European brokerage BUY recommendations since 2005. In 2011 it decided to launch the strategy – Man GLG Europe Plus – as an ETF in partnership with Source, and has since gone on to become one of the world’s largest equity ETFs with around USD900m under investment.
 
The upside to this research is that two weeks ago, Man GLG decided to broaden out the strategy and tap in to Asian brokerage expertise. The Source Man GLG Asia Plus ETF and Source Man GLG Continental Europe Plus ETF are now available to investors.
 
“We conducted this research on the back of client demand. A lot of clients really liked the ‘Europe Plus’ strategy and asked if there was a possibility to launch a global product. What we found was that Asia ex-Japan analysts were the best performers. Their alpha – excess returns above the market – over 100 days is nearly two times better than Europe or the US. The results confirmed our belief that Asian markets are less efficient than western markets,” says Khalil Mohammed (pictured), one of the co-authors and a portfolio manager at AHL/MSS – the systematic trading division of Man Group.
 
The findings of the research showed that whilst analysts from all regions were able to add value, those in Asia Pacific ex-Japan were able to add the most value, delivering a strong uptick in outperformance and steady cumulative return that exceeds four per cent over 100 days.
 
By comparison, Japanese analysts delivered a much stronger initial uptick in outperformance over the first couple of days, locking in the majority of alpha before levelling off from day 10 onwards.
 
Mohammed notes that whereas SELL recommendations in Europe, on average, typically do not work, in Japan they do. “It seems that Japanese brokers do have the ability to call SELL recommendations accurately, which we have not seen in Europe and the US,” says Mohammed.
 
Results show that whereas Japanese SELL recommendations are still profitable after 100 days (approximately -0.6 per cent), US analyst SELL recommendations are already in positive territory over the same period.
 
Mohammed says that whilst the difference in performance between Asia ex-Japan and their US and European counterparts was initially surprising they actually make sense when thought of in terms of how the markets function region by region.
 
“US and European markets are very efficient, there’s more information on companies, more analysts are following these companies, and hence there’s less ability for them to generate alpha. If you look at Asia ex-Japan markets, you have a combination of emerging and developed markets. Emerging Asia markets like Indonesia, China, Korea, Thailand, Malaysia are likely to be more inefficient so the ability for analysts to do research, study company fundamentals and arrive at a BUY recommendation has the potential to add more alpha.”
 
Another reason to explain the difference is that Asia ex-Japan analysts look at a smaller universe of stocks; typically they are following on average six stocks compared to eight stocks in the US and Europe. This means they are able to focus more on their stocks and build a more in-depth understanding.
 
The difference in analysts’ performance between emerging and developed Asia markets (e.g. Australia, Hong Kong) was similar, both generating around three per cent returns after 50 days.
 
Japanese analysts seem particularly adept at providing both accurate buy and sell recommendations because the markets do not view them as making their own forecasts but rather company forecasts. In other words, Japanese analysts are like conduits for company information. Their recommendations are based closely on corporate management according to the research, whereby companies provide them with good and bad news.
 
All of which explains why Man GLG has broadened the strategy to include Asian analyst recommendations. Next in line could be a version of the ETF that focuses purely on Japanese BUY recommendations, though this is not imminent.
 
“Even though trading costs are higher in Asia we know there’s alpha to be captured and we think the ‘Asia Plus’ strategy can be very effective. Already in the space of two weeks we’ve attracted in excess of USD100m following the strategy,” says Mohammed.


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