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13 Sep 2009 11:47pm

Analysts’ share tips ‘beat most funds’

By Sam Jones in London

Broker stock picks can help investors outperform most mutual funds, research by one of the largest hedge funds has suggested.
While most asset managers have long dismissed analysts’ recommendations as anything but reliable, traders and academics at GLG – the $21.5bn London hedge fund manager – have found otherwise.

Based on a database of the daily recommendations it received from European brokers for the past four years, the hedge fund found that a portfolio following analysts’ tips, and holding them for three months, would outperform 75 per cent of mutual funds.
Such a portfolio delivered annualised returns of between 2.8 per cent and 6.4 per cent above benchmarks and after fees in each of those four years.

GLG said the research was some of the first to be conducted into the value of equity analysts’ calls since the scandals and subsequent reforms that rocked brokerages after the telecoms and tech bubble.

“When you look at the returns the average active manager tries to beat benchmarks by, we think the outperformance of recommendations is reasonably good,” said Sandy Rattray, an asset manager at the fund.

GLG’s findings were based on all the recommendations from salespeople at a range of European brokerages it had received since 2005, based on a single daily “pick” given to the fund from each.

The research also found that based on the broader universe of all published calls on stocks, following analysts’ buy recommendations was a consistently better strategy than following their sells – at no point more so than during the past year.
The equities rally has caught most analysts off guard, according to data in the research.

In spite of a greater number than usual, sell recommendations have performed “very poorly”, with most analysts’ negative fundamental views of groups they cover not reflected in runaway share prices.

GLG is not the first hedge fund to have taken an interest in analysts’ recommendations.

Marshall Wace, another hedge fund, launched its Trade Optimised Portfolio System in 2002.

It uses algorithms to execute trades based on the daily recommendations of hundreds of brokers and analysts.

©The Financial Times Ltd 2009