International Core Stocks Strategy: Cloning Consensus Picks

by: AlphaClone
By Maz Jadallah

Last week we introduced a family of new clones that follow the top ETF picks across AlphaClone's fund universe. The AlphaClone ETF Index allows you to invest in the same ETFs that the world's best investors are investing in and it's perfect for those of you who like an ETF-only investment approach.

This week, we're going to highlight the same approach but for international stocks. While the group has been around since we launched, we're introducing the AlphaClone International Index here as an AlphaClone Core strategy.

The group works much the same way as our AlphaClone ETF Index with one important difference – it excludes institutional investors and only includes the ADR picks of hedge funds in AlphaClone's universe (about 200 out of a total of 300 including institutional investors). Why exclude institutional investors? Simple, when it comes to picking individual equities, our research shows that hedge funds have an edge over other institutional investors.

If you've used AlphaClone before, you know that we derive and backtest multiple clones from each fund group including: Top 1, 2 3 or 5 Holdings, Best 1, 2, 3, or 5 Ideas and Top 1, 3, 5, 10 or 20 Popularity. If you've been reading our blog, you know we tend to like the Popularity strategy because it's based on the consensus picks among the group's largest 20 positions – so it's “consensus with conviction” if you like.

The table below summarizes this group’s Top 10 Popularity clone over the 1, 3, 5, and 10 year time periods. The results are compared against the BNY ADR index.

International Index/Top 10 Popularity Long Only (as of 5/14/2010)

Ann. Returns Clone BNY/ADR Index +/-
1 year 48.10% 10.90% 37.20%
3 year 0.90% -12.50% 13.40%
5 year 20.10% 0.60% 19.50%
Since 2000 4.90% -3.00% 7.90%
Ann. Volatility

1 year 14.70% 20.10% 5.40%
3 year 34.60% 25.80% -8.80%
5 year 29.60% 21.40% -8.20%
Since 2000 28.50% 19.50% -9.00%

The first thing that jumps out at you is how much better the clone performs versus its benchmark index. The clone’s annualized five year returns outperformed the index by over nearly 20 percentage points! The clone’s volatility is higher than that of the index but it still trounces the index on a risk adjusted basis, delivering a 0.5 Sharpe Ratio as compared to the index’s -0.2. Finally, this clone is up 48.1% over the past 12 months, nearly five times as much as the BNY ADR Index which is up 10.9% over the same period. That’s impressive performance by any measure and certainly worth considering as part of any investor’s international portfolio allocation.

Here's what the clone holds currently – at least until this Friday, May 21 when AlphaClone will rebalance all its clone portfolios based on 3/31/2010 period filings. Stay tuned.

Current Portfolio as of 5/14/2010

Name Ticker Close Rebalance

05/14/10 02/19/10
Teva Pharm... TEVA $56.80 $58.55
Baidu Inc BIDU $73.98 $50.02
Fomento Econ... FMX $44.36 $41.46
Home Inns... HMIN $36.19 $32.59
Petroleo Brasil... PBR $37.65 $42.33
Ctrip.Com Inter... CTRP $37.99 $35.33
Royal Bank of Sco... RBS $14.47 $14.75
Cadbury PLC OTC:CDSCY $53.50 $52.46
America Movil ... AMX $49.23 $45.33
Vimpelcom VIP $15.78 $18.37