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Principal links unique quant techniques to stock analysis

Principal Global Investors is pushing its way on to consultants' buy lists with an equity product that marries quantitative investment techniques with the flair of 60 analysts.

It has won five mandates totalling $700m (€553m), lifting quantitative-driven equity funds to $30bn over the past year. Its global equity fund has beaten the index in dollar terms by 6.6 percentage points over three years. Low volatility produces an information ratio of 2.23, more than twice the figure consultants look for. Other results are almost as impressive. A consultant said: "We like managers that use quantitative to anchor their process and Principal's performance is promising." In the second quarter, returns fell sharply as the market wobbled but Principal said the market's anxiety level was unusually high in the period. The company, based in Des Moines, Iowa, was founded in 1879 and chief executive Jim McGaughan is proud that Fortune magazine dubbed it one of the 100 best places to work in the US. The company has long-established skills in fixed income, where it manages $95.6bn. It looks after real estate worth $34bn and controls boutiques such as Columbus Circle and Spectrum Asset Management. John Pihlblad, who founded Globeflex, a boutique manager, began his career as a buyside stock analyst in Kansas City. He realised computers would play a role in fund management and moved to Systematic, the quantitative arm of Nicholas Applegate. He set up Globeflex to put new ideas to the test. This year, one of Pihlblad's successors, Stacey Nutt, also left Systematic to develop his operation. Pihlblad persuaded analysts to select stocks identified by his quantitative screen and Principal jumped at the chance to put its equity team at Pihlblad's disposal. GMO and, to a lesser extent, Bernstein are among the managers that take a similar approach. The analysts make stock selections out of the 20% cheapest stocks suggested by Pihlblad's software programme. Pihlblad said: "The model always comes first. We don't end up buying stocks just because we get on with the chief executive." Changes in expectations are crucial to Pihlblad's model. It scores stocks according to expected sales and earnings per share growth as well as improvements in operating margins. Using Starmine data, it reorders stocks to take account of positive and negative broker revisions. To dampen momentum and growth factors, Principal ensures stocks with earnings multiples close to the average – at present 14 times prospective earnings. It does not screen out small-cap stocks, believing the search for value needs to be broad but size and sector characteristics are kept in balance. Annual stock turnover is 100%. Principal's analysts have to base their research on the 20% of stocks best rated by the quantitative system. They have helped to develop it and check the data that goes into the computer.

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