EDHEC-Risk - EDHEC-EuroPerformance Alpha League Table

EDHEC-EuroPerformance Alpha League Table

The Reference Rankings in Europe

EDHEC and EuroPerformance have set up the first European ranking of asset management firms based on an accurate measure of risk-adjusted performance: the Alpha League Table.

The Alpha League Table evaluates asset management firms in terms of their equity management and their ability to deliver alpha. As an absolute arithmetic magnitude that does not depend on any category, alpha levels are easily comparable.

Finance professionals have shown considerable interest in this new alpha-based performance measure, developed using the EuroPerformance-EDHEC Style Ratings. Cutting-edge techniques provide a true measure of risk-adjusted performance (alpha), while taking into account extreme risk and persistence of outperformance.

It is our ambition that this analysis will become the primary reference in the ranking of asset management companies.

Following our previous editions, which focused on France, Italy, Spain, Switzerland and the UK, we are now launching the 2008 season.

Background

In November 2004 in Paris, EDHEC and EuroPerformance presented the first fund ratings based on alpha: the EuroPerformance-EDHEC Style Ratings.

These ratings provide a response to both academic and professional criticism directed at traditional fund ratings. The latter rely on relative rankings defined within categories that do not take the risks that were really taken by the manager over the analysis period into account and do not therefore allow the performance of active management to be evaluated and rewarded, whether the performance comes from stock picking or tactical allocation.

In 2005, on the basis of the Style Ratings, EDHEC and EuroPerformance set up special rankings to distinguish European asset management companies according to their capacity to deliver alpha for all of their "equity" funds: the Alpha League Table.

For each company rated, the Alpha League Table highlights its alpha intensity, which is constructed from two indicators:

The average alpha, which gives the value of the average alpha for the funds that outperformed their benchmark
The frequency of alpha, which represents the percentage of funds that have a positive alpha

These annual rankings cover major geographical areas: France, Spain & Italy, Switzerland and the United Kingdom.

The Alpha League Table by Country

France

Alpha League Table France 2008

The third ranking for France reveals that both the frequency of alpha and the average alpha generated by French asset managers have fallen in comparison with the 2007 edition.

Average alpha dropped from 2.98% to 2.50%, a decline that may be attributed in part to the behaviour of small-cap stocks. Small-cap stocks, which in France have a large role in the production of alpha, fell over the second half of 2007, just as broad-based indices did.
Overall, levels of alpha generated by French funds dropped especially in France, but also in emerging markets, in Asia (excluding Japan), and in European sector funds. Average alpha rose however for funds in International markets and in Japan.
The winner of the 2008 edition is HSBC Private Bank France with a score of 1.52%, resulting from 53.2% of its selected funds generating significantly positive alpha and an average alpha of 2.89%. MMA Finance, with a score of 1.43%, takes second place after improving from eighth position last year. The biggest jump in this year’s edition was from State Street Global Advisors France. The firm moved up sixteen places in the rankings to third.
Style-factor analysis shows that, compared to last year, there has been a clear reduction in portfolio exposure to small-cap and mid-cap stocks. These stocks, the major sources of alpha in the French, European, and euro-zone markets, likewise account for smaller shares of instruments invested in Japan. Another reason can be found in the large current falls in the stock markets, in the wake of the turbulence experienced by the shares of financial companies. As the shares of these companies make up a large share of Value-type indices, 2007 has seen a tilt towards Growth-style.

Download the Alpha League Table France 2008

[Consult previous editions]

Spain & Italy

Alpha League Table Spain and Italy 2008

This third edition of the rankings of Spanish and Italian asset management firms shows a fall in the alpha generated by the firms in the rankings. Average alpha for Spain fell from 2.38% to 2.08% and for Italy from 1.53% to 1.14%. These figures compare unfavourably with the average alpha for asset management companies in Europe overall of 2.48%.

Monte dei Paschi di Siena takes first place in Italy, with a score of 0.39%. Gruppo Ubi Banca is second, up two places from last year. Its score of 0.36 is the result of a significant increase (66 basis points) in its average alpha, which stands at 1.33% this year. Pioneer Investments, in second place last year, is now ranked third. This firm has the widest range of funds of the firms in our rankings. In fourth place is last year’s winner: Gruppo Banca Intermobiliare, whose decline is largely the result of its inability to maintain last year’s high level of alpha. For the second year in a row, Gruppo Bipiemme is in fifth place.
For Spain, Bankinter is once again in first place, with a score of 1.49 obtained on the strength of alpha of 3.22% and a very respectable frequency of 46.79%, the highest of any firm in the Spanish rankings. Ibercaja Gestión is ranked second, with an average alpha at 3.13%, which is among the highest of any Spanish bank. Gesmadrid, which was in seventh place last year, is now third. Renta 4 Gestora takes fourth place (up one from last year). In fifth place, falling one place from last year, is Bancaja Fondos. A fall in average alpha is entirely responsible for this slide.
As in France, Germany, and the Netherlands, asset management in Italy and Spain suffered from significant withdrawals of investors in 2007, according to the European Fund and Asset Management Association (EFAMA). One of the reasons for the poor results of Italian asset management, relative to the European average, is the country’s tax regime. The defining characteristic of the Spanish market is the overwhelming presence of banks in the asset management industry. A large majority of the assets under management are held by banks or managed by their asset management affiliates.

Download the Alpha League Table Spain & Italy 2008

[Consult previous editions]

Switzerland

Alpha League Table Switzerland 2008

The Alpha League Table 2008 for Switzerland reveals that:

The private bank Sarasin takes the top spot. After having ranked third in 2006 and second in 2007, the firm confirms the excellent results of its equity management and shows that it is one of the leaders of active management in Switzerland.
With a score of 1.84, the specialised asset managers Vontobel are in second place. Excellent results are obtained over a wide range of equity funds. Some twenty investment vehicles delivered returns in excess of their benchmarks, an achievement that has become a veritable Vontobel trademark. Third in the rankings, with a score of 1.22, is the bank Swisscanto, third last year as well. Alpha is delivered by the bank in six categories and comes to 2.91%. The gain frequency of 41.6% is an improvement on last year.
For this 2008 edition of the Swiss Alpha League Table, the alpha delivered by equity management comes to 2.31%. The average frequency of alpha improves (+50 basis points) to 38.5%.
Most outperforming funds are to be found in the largest zones and also in the domestic market. For example, international shares account for nearly 30% of the funds that outperform their benchmarks. The Swiss equity markets account for 21.5% of these funds and Europe for 12.6%.
The alpha measured over the different investment zones registers but a slight drop from last year. It is thus sufficiently significant in those zones that have the greatest concentration of funds. This is especially the case with products invested in international shares, where the average alpha rose to 2.44%.
The bias of Swiss portfolios toward growth styles (to the detriment of value styles and small caps) has allowed them to maintain levels of alpha from one year to the next.

Download the Alpha League Table Switzerland 2008

[Consult previous editions]

UK

Alpha League Table UK 2007

The Alpha League Table 2007 for the UK reveals that:

The winner of the 2007 edition is Aberdeen Asset Managers with a score of 2.82%. Frequency of alpha is high, with 81.2% of selected funds generating significantly positive alpha. Average alpha is 3.48%. Jupiter Asset Management, with a score of 2.68%, takes second place, and M&G Securities takes third place with a score of 2.51%.
The rankings are dominated by the firms that attract the largest asset inflows, so it is no surprise to see such firms as Schroders, Fidelity or Invesco among the top ten.
Overall, by the yardstick of alpha generated in equity funds, the results of UK asset management firms are far superior to those noted in our earlier analyses of French, Italian, Spanish, and Swiss firms. With a frequency of funds delivering alpha of over 45% and average alpha of 2.6%, UK asset managers provide unparalleled active asset management.
Average alpha is high in all investment zones. Asia and sector funds offer the greatest opportunities, with alpha levels of 5%. The large number of international funds, with average alpha of 3%, is characteristic of the quality of UK asset management. Europe, emerging markets, and Japan generate average alpha of between 2% and 3%. Funds invested in UK securities, however, have an average of less than 3%.
On average, the “alpha” funds favour large-cap stocks and the share of small caps is limited to 30% of the portfolios.

Download the Alpha League Table United Kingdom 2007

[Consult previous edition]

Methodology

For the first time in Europe, a ranking methodology provides a clear distinction between the talent behind the active management (alpha) and the other elements of performance that are linked to the market (beta).

The Alpha League Table, which is compiled using the Style Rating developed by EuroPerformance and EDHEC, with scores of 4 and 5*, is the first European ranking system that rewards asset management companies on the basis of their capacity to generate alpha from their equity funds.

Alpha at the heart of management evaluation

At a time when passive management is growing considerably, it appears essential for the asset management industry and investors to be able to identify those talented active managers who are capable of providing their clients with an outperformance (alpha) that extends beyond the returns naturally generated by a fund's long-term exposure to market risks and different investment styles (beta).

When calculating alpha - the outperformance obtained by the asset managers above and beyond the "normal" returns achieved through exposure to market risks and investment styles - one must presume that a fund's risk exposure (beta) is determined precisely. The benchmark representing the risks actually taken by an asset manager is determined by analysing the fund's returns using a Return-Based Style Analysis, the method developed by Nobel Prize winner William Sharpe*.

Presentation of the Alpha League Table

The Alpha League Table provides a ranking of the best asset management companies in Europe on a quarterly basis. The table focuses each year on four European zones in particular: France, Italy and Spain, Switzerland and finally, the UK. This year's tables will again be divided up into four quarters.

The ranking is designed using a score based on the alpha intensity of each asset management company.

The Alpha League Table score: alpha intensity

The objective of the Alpha League Table is to allow asset management firms to be ranked according to their capacity to generate alpha frequently: alpha intensity.

Alpha intensity is the product of two indicators calculated using information from the EuroPerformance-EDHEC Style Rating:

The alpha frequency in the investment product range, which is determined according to the number of funds with strictly positive alpha (4 or 5 stars in the Style Rating) out of all of a given company's rated funds;

The average alpha, which corresponds to the average percentage of alpha of the funds with strictly positive alpha (4 or 5 stars in the Style Rating).

The Alpha League Table alpha intensity score is the product of the alpha frequency and average alpha figures.

Example:

If company X has an alpha frequency of 30%, i.e. 3 funds out of 10 have received a score of 4 or 5 stars, and an average alpha (>0) score of 4%, then its final rating will be: 4% x 0.30 = 1.2%.

Similarly, if the company has a frequency figure of 50% and average alpha of 3%, its final score will be 3% x 0.50 = 1.5%.

Winners' circle

Each month, a ranking on the basis of this final score is established. Only those companies that have participated in the 12 monthly rankings are included in the annual one.

This year, the relevant calculations cover the period of January 2006 to December 2006.

In the final winners' circle, the companies are ranked according to the average of their 12 monthly scores.

Asset management firms included in the Alpha League Table

The companies included in the ranking must meet two criteria:

Eligibility in the market under analysis

All officially recognised asset management companies in the relevant zone are eligible for the Alpha League Table.

This year, foreign companies with no commercial activity in France are excluded. However, all managed and marketed funds in officially recognised companies are included, regardless of the fund’s country of domicile. When a company delegates the management of a fund to another company, the fund is considered as part of the secondary company for the purposes of the ranking.
Statistics criteria

Because the table represents an assessment based on a company’s equity product range, only companies for whom at least 2/3 of this range has been analysed under the EuroPerformance-EDHEC Style Rating are included.

Companies that meet the above criteria must have at least 6 rated funds under the EuroPerformance-EDHEC Style Rating in order to qualify for the Alpha League Table. These must be divided into a minimum of four categories of analysis.

Funds included in the final score

Equity funds are eligible for the Alpha League Table, on condition that they have been included in the EuroPerformance database and have been rated under the Style Rating, the scoring system developed by EuroPerformance and EDHEC. For this to be the case, they must have been in existence for at least three years, must have provided returns for the full calculation period (156 weeks) with no more than two failures to do so, and must not belong to any of the following categories:

Gold and raw materials
Real estate
ETFs and all index-managed mutual funds

Style Rating

The EuroPerformance-EDHEC Style Rating is based on three criteria:

Risk-adjusted performance (alpha)
Potential for extreme loss (Value-at- Risk)
Performance persistence

This scoring system incorporates the most advanced technical and conceptual research. It measures the quality of active management and then awards a score of 1 to 5 stars.

The 1- and 2-star categories contain funds that on average do not outperform their management objectives. The 3-star category represents funds whose performance is close to the returns achieved on the market in which they invest. 4 or 5 stars are awarded to funds that generate outperformance for the period under analysis. This is the product of management decisions: stock picking and/or market timing. Some of these high-performance funds offer significant gain frequency, indicating persistent outperformance. They are awarded the maximum score of 5 stars or 5*H, where the “H” symbolises the regularity with which they appear in the excess returns category.

About EuroPerformance

EuroPerformance, a fund analysis company, is a subsidiary of the FININFO group, the leading French financial information company. Specialised in data collection, EuroPerformance has developed tools with considerable value-added in the areas of performance and risk analysis through a broad referential database of European funds.

*"Asset Allocation Management Style and Performance Measurement", W.F. Sharpe, Journal of Portfolio Management, Vol 18, winter 1992, pp7-19