Europe's best ideas

If like many analysts, you believe that continental European equities are attractively valued, a good way to get exposure could be the Man GLG Europe Plus Source exchange-traded fund (ETF). It has all the usual advantages of ETFs like ample liquidity and low costs, plus one important difference.

It tracks an index - the Man GLG Europe Plus - whose composition is dictated not by market capitalisations of its consituents, but by broker recommendations. Share tips from 65 brokers are fed into a computer program, which filters them down to around 200 stocks. The screen filters only include stocks from 17 eligible European countries and removes those that are not easy to buy and sell.

Man says that using its methodology for the period 1995 to 2010, analyst buy recommendations only underperformed in 1997. And sure enough, over the last three years the index has outperformed mainstream European equity markets such as MSCI Europe by between 2 per cent and 8 per cent a year, before fees. Its target is to make returns 2 per cent to 5 per cent above the broad European equity market. And its annual management fees of 0.75 per cent won't eat into too much of your return in any years when outperformance is at the lower end of that range.

Man GLG has run products based on broker recommendations since 2005, including the GLG Espirit Continental Europe Fund (click here to see our interview on this fund). However, the ETF does not represent a consensus view: if more than five recommendations come for a particular company on any given day the index will stop allocating to it, and if further recommendations for it come the index will start to reduce exposure to that company. Conversely, when a mix of buy and sell recommendations comes in, the index closes the position to zero, on the grounds that when the consensus starts to break down, it is a good time to sell.

Allocation to each share is adjusted according to whether the broker who suggested it sets the trends in share suggestions or just follows other brokers. Contributing brokers are reviewed continuously based on their results and how they perform against their peers.

Only 20 per cent of ideas received by GLG have a similar analyst recommendation in public database of broker recommendations within 10 days. "This fund provides exposure to top broker views, and is a low price for access to some extremely good ideas," says John Fletcher, senior analyst at Charles Stanley.

The portfolio is adjusted to ensure its allocation to small, medium and large caps is broadly the same as the MSCI Europe Index, to avoid the volatility that a higher allocation to small and mid-caps would bring.

This constant reviewing process means the index is rebalanced far more frequently than traditional benchmarks, which may only be reviewed every quarter or even every year. If the ETF bought the underlying shares, all that share dealing would result in much higher costs, but it uses swaps to replicate the returns the index makes. That introduces counterparty risk, which Source mitigates by having five swap counterparties: BoA Merrill Lynch, Credit Suisse, Goldman Sachs, JP Morgan, Morgan Stanley and Nomura.

It is not fully collateralised, but pledges to hold collateral worth at least 95.5 per cent of its value, limiting counterparty exposure to 4.5 per cent at most. The collateral is mainly European equities, and Source plans to provide daily updates on collateral holdings on its website (www.sourceetf.com) in the future.

Another risk is currency movements; Man GLG Europe Plus Source is listed on Deutsche Börse and denominated in euros, so your returns will be affected by currency movements.

Key fund data:

Source: Source.

TOP 10 HOLDINGS as at 11 April 2011.

Geographical breakdown: