Merrill Lynch Introduces Alpha Surprise Model Index.
The ML Alpha Surprise Model Index has historically offered a higher level of return and a lower level of risk than the S&P 500. It has generated 11.4 percentage points annual total return since December 1999 vs. the S&P 500's 1.2% over the same period, and the volatility of returns has been lower than that of the S&P 500.
"The insight of the model is demonstrated by its track record, and the philosophy behind it is simple: we seek to capture the most undervalued high conviction calls from our analysts using an objective, quantitative process," said Savita Subramanian, quantitative strategist at Merrill Lynch.
The Alpha Surprise Model draws on the unique insights of Merrill Lynch U.S. fundamental equity research. There has been a general correlation between Merrill Lynch fundamental equity analysts' out-of-consensus earnings estimates and future stock performance. Specifically, when Merrill Lynch equity analysts have forecasts that are significantly above the consensus estimates, these high conviction ideas have historically been predictive of above-market stock price performance.
The Alpha Surprise Model focuses on those companies for which Merrill Lynch equity analysts have a high degree of conviction in the direction of earnings estimates. Starting with these high conviction stocks, the Model then identifies those that appear to be undervalued, and generates a list of stocks that are attractive based both on the earnings expectations and valuation.
"For the Alpha Surprise methodology, we rank stocks selected from the S&P 500 using a 75%/25% weighted combination of our Merrill Lynch vs. Consensus Earnings Surprise Model (the growth or "Surprise" component) and our Dividend Discount Model (the value or "Alpha" component)," said Subramanian. "The 'Surprise' component identifies stocks where Merrill Lynch analysts have earnings forecasts that are significantly above consensus estimates, and the 'Alpha' component identifies those stocks that are inexpensive."
The ML Alpha Surprise Model Index is constructed as an equal-weighted basket of the Alpha Surprise Model's stocks, which are selected each month.
The daily price and total return indices are available on Bloomberg under the symbols MLASM1PR and MLASM1TR, respectively.
Merrill Lynch's U.S. Equity Research Quantitative Strategy team is part of the firm's Global Securities Research and Economics Department, which has more than 750 analysts, economists and strategists.
Merrill Lynch is one of the world's leading wealth management, capital markets and advisory companies with offices in 37 countries and territories and total client assets of approximately $1.6 trillion. As an investment bank, it is a leading global trader and underwriter of securities and derivatives across a broad range of asset classes and serves as a strategic advisor to corporations, governments, institutions and individuals worldwide. Merrill Lynch owns approximately half of BlackRock, one of the world's largest publicly traded investment management companies with more than $1 trillion in assets under management. For more information on Merrill Lynch, please visit www.ml.com.